Manufacturing's vital signs improving?

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Two important piece of official data for manufacturing relesed today are swimming against the tide of negative economic news.

Firstly on trade - the goods deficit shrank in May as exports rose more quickly (up 7.8% on the month) than imports (1.5%). By market, UK exports saw a month on month rise to both the EU (including the troubled eurozone) and non-EU countries. While there was a particuarly strong bounce in goods trade with non-EU manrkets more noteable is that the value of these exports surpassed sales to Europe in May by nearly £650bn. This compares to the gap of nearly £2bn in export to EU and non-EU markets a year ago.

Compared with a year ago exports to both core and periphery countries are down (in France and Germany by 9.1% and 2.3% respectively).

Over the same period exports to China and the US were up 26.3% and 11.6%.

The good news wasn't just on the trade front. Defying the PMI gloom in May, which had put the activity indicator at a 3 year low, manufacturing output posted a solid 1.2% gain, reversing the falls in April. Even with the inevitable confusion that will come with the additional Bank holidays in June, we shouldn't be too quick to write off a positive quarter of growth for the sector in Q2.

But as the chart below shows, it is volatility that has been one of the primary features of the output data since the beginning of this year. While any growth is positive, in terms of the level of output we're pretty much where we were at the start of the year.

But one of the key points that has emerged from our discussions with manufacturers is that there isn't one straightforward story for the sector. The woes in the eurozone are weighing on many, both in terms of the visibility of order books and what it means for their investment plans. But as the trade data show, new opportunities have not dried up. Indeed, there are aslo plenty of companies still out there that are marching into the second half of the year with growth in their sights.

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Chief Economist

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