Q1 GDP preview: Manufacturing perspective

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The preliminary ONS estimate of first-quarter GDP will be published tomorrow, providing the initial official view of manufacturing output over the first three months of 2014. All the signs are that the data will confirm a robust performance across the sector and for the economy as a whole.

Manufacturing output in January-March is expected to have risen at its fastest pace in three and a half years, laying a firm foundation for the remainder of 2014.

Recent developments in the manufacturing sector have been encouraging, with activity trending higher, productivity improving, employment strengthening and real wage growth outpacing that of the wider economy. Manufacturing output rose by a buoyant 1% in February, marking the third consecutive month of growth and lifting the annual rate of expansion to a three-year high of 3.8%.

Even if activity was stable in March, the sector was on track to grow by an impressive 1.1% quarter on quarter over the first three months of 2014. But we anticipate an even better outturn. Recent survey data have signalled ongoing expansion, with the March manufacturing PMI of 55.3 implying a twelfth consecutive month of improving business conditions in the sector (the index has cooled slightly since the turn of the year, but remains well above its long-term average of 51.4). A picture of solid production and new orders growth also tallies with the findings from the latest Bank of England Agents' report, which highlighted robust activity in the aerospace, automotive and construction supply chains.

Fourth successive quarter of growth

Bringing all this together, output in the manufacturing sector is likely to have expanded by at least 1.2% over the first quarter of 2014, which would equal the best performance since July-September 2010. Aside from a very strong pick-up in Q2 2010 (which was boosted in part by a weather-related bounceback and a one-off inventory boost), you would need to go back to the final quarter of 2004 to find a stronger quarterly outturn.

Manufacturing activity has increased in each of the last four quarters, and there is every expectation that this run will be extended further over the April-June period.

International standing

The sector is still playing catch-up from the effects of the severe 2008-09 downturn, with output remaining around 8% below its pre-crisis peak. But although manufacturing activity in the UK fell more sharply than other domestic sectors during the recession, its performance internationally stands up reasonably well to comparison, as the following chart shows.

Manufacturing output in the G7 economies (2008=100)

Source: ONS.

The UK may have experienced the second largest economic slump among the G7 countries, but the level of manufacturing output actually held up fairly well on a comparitive basis. Since 2010 the UK's recovery in the manufacturing industry has been broadly in line with the G7 average. Germany and more recently the US have been the strongest performers—output in Germany initially rebounded very strongly, but has edged slightly lower since 2011. As the chart highlights, the UK's robust manufacturing performance in the first quarter of 2014 could well see the country's level of output surpass that of Canada.

Best since 2010?

There is considerable momentum in the UK economy at present, with the ONS data expected to show robust GDP growth of 0.8-0.9% in the first quarter of 2014, up from 0.7% in the final three months of last year. On a year-on-year basis, first-quarter growth is likely to be the strongest since late 2007, at above 3%. With the picture across the Eurozone pointing to a modest, but steady, improvement in demand in the UK's largest trading partner, near-term prospects for the UK economy remain positive.

Given the robust start to 2014, manufacturing output appears on course to grow in excess of 3% this year, and may well outpace the rate of expansion of the economy as a whole. This compares with a contraction of manufacturing activity 0.6% in 2013 and would mark the strongest annual performance since growth of 4.1% in 2010.

Remember to tune into the blog tomorrow for full analysis of the Q1 GDP data.


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