Today’s Index of Production figures show an increase in total production output of 0.2% between Q2 2014 and Q3 2014. The release confirms that the UK – relying on the strength of its domestic market – is bucking the trend of depressed production activity throughout Europe.
Manufacturing the star performer
When it comes to production, this quarter’s star performer is the manufacturing sector, which provided the largest contribution to the quarterly growth figure of 0.4%. In fact, of the four main sectors, manufacturing output was the only one to rise on year, contributing 2.9% growth to a total increase in production output of 1.5%.
A slight cooling in manufacturing output from 0.5% to 0.4% between Q2 and Q3 2014 went in line with GDP figures slowing from 0.9% to 0.7%. Manufacturing output now stands 4.1% below its pre-recession peak, while production output is still 9.5% lower. Nevertheless, manufacturing output is expected to grow by at least 3.3% this year: faster than GDP.
Manufacturing has been benefiting from a benign inflation environment pushing down material prices and energy costs. Combined with strong domestic demand this has allowed manufacturers to offer more competitive prices to customers and increase their output.
Output increased in seven of thirteen manufacturing subsectors between Q2 and Q3 2014. The food & drink sector provided the largest contribution to production output. The majority of this growth was down to the bakery & flour products industry which increased by 5.2% on quarter.
Over the year, the food & drink sector was again the strongest performer contributing 0.7 percentage points to production output. On the other hand, pharmaceuticals provided the largest negative contribution with -0.2 percentage points.
This appears to be a common pattern across production data where current economic conditions are favouring domestic market-oriented industries or sectors whose majority of exports travel outside the EU. Indeed, the food & drink sector is largely domestic market focused while pharmaceuticals are one of the most export-intensive manufacturing sectors.