Disappointing trade and production data for February means the UK economy needs the service sector to avoid disaster and support growth in 2016q1.
A run of data releases over the past couple of days make for pretty grim reading – industrial production fell in February, driven by a sharp contraction in manufacturing; total exports took a step back from the government’s £1trillion target over the past three months and productivity growth isn’t showing any sign of getting out of first gear.
The weak production numbers didn’t come entirely out of the blue. EEF’s Manufacturing Outlook survey (a sort of crystal ball for @EEF_Economists) has reported deteriorating output balances since the middle of last year, including for the first three months of 2016. And the recent manufacturing PMI also hit its lowest quarterly average since 2013q2.
What is, perhaps, more surprising is the broad-based nature of the weakness in February across manufacturing sub-sectors, with only chemicals and pharmaceuticals increasing output over the month.
The fall in transport output in February (-2.9%) for example, seems at odds with the strong fundamentals across the sector – and we’d be inclined to chalk this up to data volatility. But the oil and gas related challenges facing sectors such as mechanical equipment are still very much at play. Indeed, recent meetings with EEF members suggests that no one is expecting oil and gas related activity to turn a corner any time soon.
Linked to oil and gas, but also facing massive problems from Chinese imports, exchange rate volatility and over-capacity – the collapse in iron and steel output over the past 12 months (down by more than a third) reinforces the need for action from all stakeholders to stabilise the sector.
Also obvious in recent business surveys is the lack of support from the global economy in boosting output and export growth. Again, the fall in exports over the less bumpy three month on three month comparison, isn’t a shocker with good and services exports to both EU and non-EU markets in the red over this period. So, we’re not getting any closer to meeting the government’s ambitions of doubling the value of UK exports to £1trillion by 2020.
Recent falls in Sterling may start to feed through to a brighter picture on exports in the coming months, but new forecasts from the WTO today suggesting that another year of sub-par global trade growth in on the cards for 2016 will likely have a much bigger bearing on the trajectory of UK exports through this year.
So in summary, none of this bodes especially well for balanced growth over 2016q1, when we get the first estimate of GDP later this month. It’s again down to services to do the heavy lifting. Service sector PMIs haven’t held up too well in the first few months of this year either, so our more cautious forecast for GDP growth in q1 (0.4%) and for 2016 as a whole (1.9%) still feels about right.