UK manufacturing still on track despite weak production and trade data

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Production Data

Today’s ONS Index of Production data saw manufacturing expanding by a modest 0.3% on month, pointing towards a slowdown in manufacturing activity compared to earlier in the year. However, solid annual figures and positive expectations by UK manufacturers indicate that manufacturing will achieve its EEF forecast of 3.3% growth for 2014.

Manufacturing output remains on track with eight out of thirteen manufacturing subsectors experiencing growth over the last month. Basic pharmaceutical products saw the highest increase by 4% followed by a 2.2% increase in electronics.

On the other hand, the production of textiles dropped sharply by 3.9% and transport equipment was the largest downward contributor to manufacturing growth, deducting 0.1 percentage points from total production. Nevertheless, strong growth in textiles and transport equipment in the preceding months means that we expect these sub-sectors to post positive growth over the course of the year.

Trade data

The cooling off in manufacturing activity is mirrored in the trade data released earlier today by the ONS, where the deficit in goods and services widened further in the three months to July. Positive monthly figures showing goods exports up by £0.5 billion were side-tracked by less than encouraging 3-month data.

This ties in well with Manufacturing Outlook, EEF's quarterly business trends survey, which showed weak demand in export orders for UK manufacturers over the past three months. A combination of geopolitical tensions, sluggish demand from the Eurozone and a strong Pound is weighting down on export demand.

In the three months to July, the trade in goods deficit widened by £2.9 billion, with exports falling by 0.3% and imports accelerating by 3.2% - more than ten times the rate of export growth. Indeed, total manufactured exports excluding erratics performed poorly in the last 3 months, declining by 0.6%, while on year figures saw a modest 0.9% increase.

Manufactured products import figures continued to increase at a marked rate of 1.8% compared to the previous three months and 3.4% over the same three months last year. More than half of the three month deficit was down to trade in machinery and transport equipment where aircraft and cars experienced significant import but little export activity. It seems that a considerable portion of the trade deficit in transport equipment is down to erratic purchases of aircraft and more consistently high imports of cars.

Of manufactured products, exports of chemicals contributed the strongest to net trade by adding £0.3 billion. Trade in chemicals, and more specifically trade in medicinal and pharmaceutical products, has grown by more than 100% over last 10 years showing great promise for UK exports. Chemicals are nevertheless an outlier with the majority of manufactured products contributing negatively to net trade.

Promisingly, roughly 95% of the total increase in exports was down to trade with countries outside of the EU. Exports to non-EU countries increased by £0.5 billion compared to the less than £0.1 billion increase in exports to the EU. Still, the disparity between the economic situation in the UK and its largest trading partner continues to drag on net trade. 


Chief Economist

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