The industrial production report was largely in line with what the recent preliminary GDP estimate for the second quarter had shown. While manufacturing activity weakened modestly in June for the second month in a row, the sector posted a strong gain in the quarter thanks to a bumper April. Manufacturing grew 1.8% q/q in the three months to June, the strongest gain in six years.
Pharmaceuticals and transport boosted manufacturing output
The breakdown by manufacturing sector showed that pharmaceuticals and transport equipment posted the largest gains. The strength of pharmaceuticals has been driven by new products becoming available following the recent end to the patent cliff. Transport equipment, particularly motor vehicles, have benefited from the strong UK labour market supporting domestic demand, and the weaker Sterling encouraging foreign sales.
Meanwhile, consumer facing sectors such as food and drink held up, helped by low inflation along with the strong labour market. Also, the growth of mechanical equipment indicates that the drag from the low oil price on manufacturers in the oil and gas supply chain has eased. The growth of the rubber and plastics, and non-metallic minerals, was surprising given signs that uncertainty prior to the referendum seems to have hit construction harder than other sectors.
Good news for manufacturers on the trade front
The trade deficit for goods widened in the second quarter, suggesting that net trade was a drag on GDP growth once again. But the news was much brighter for UK manufacturing. In particular, the value of manufactured exports rising to the highest since the series began in 1998.
The bottom line
The reports on industrial production and foreign trade out today aren’t a reliable guide to the impact of the referendum result because it wasn’t known until the final week of June. Upcoming reports will be cover the period after the referendum was held.
While the weaker Sterling should support exports, and manufacturing has entered the post-vote period from a good starting point, a number of post-vote surveys have been weak. There’s a need for policymakers to shore up confidence. After the Bank of England acted last week, the onus is now on the government to shore up confidence.