In my look at the week ahead on Monday I noted that we knew quite a lot about the performance of manufacturing ahead of the publication of official statistics today. The GDP estimate for 2017q2 at the end of July indicated a contraction in output over the quarter, reversing the gains seen in the previous six months.
As it turns out, the decline in manufacturing production was slightly steeper than first thought – down 0.6% against the previous estimate of a 0.5% fall. However, a sharp fall in motor vehicles output – nearly 6% on the quarter – was indeed a large part of the story.
Falls in consumer goods
Cutting the data a slightly different way, as illustrated in the chart below, it’s not all about cars (which are included in the capital goods main industrial grouping). Looking at year on year movements in manufacturing output volumes, we see further evidence of squeezed consumers in the UK. Production of consumer goods fell by over 1% in the year to 2017q2, the worst performance since the start of 2013. And with consumer goods, declines have been notable in non-durable segments (such as food, detergents and basic pharmaceuticals).
Imports continue to flow
So as we see consumer spending head south, will net trade plug the gap? Today’s trade figures don’t provide a definitive answer, but do confirm it’s not happening at the moment. Yes exports are growing at a fairly healthy pace year-on-year with total exports up 10% in the year to 2017q2, goods up over 12% and within that manufactured goods up 11%.
But our appetite for imports isn’t waning. Imports of manufactured goods continue to rise at near double-digit rates, despite the value of sterling. At least for now it seems that net trade isn’t set to take off to the extent that it will offset any further weakening on household spending.
That could change though. Reports yesterday from the Bank of England’s agents ‘network point to some evidence of a pick-up in import substitution. Not unheard of in our own engagements with manufacturers, but the impact this makes on the growth picture will depend on how quickly decisions on reshoring investment or identifying local supply chain capacity can be implemented.
In short, we’re cautious about the timing and impact of any compensating net trade boost for the time being.
What is happening in automotive?
A final word on the export numbers and back to the automotive sectors. Amidst all the generally upbeat news on overseas sales, vehicles is once again an outlier with falls in exports to the US, Middle East and EU markets in 2017q2. We talked about disappointing auto data as a temporary phenomenon driven by new model cycles. But the weakness of international data – see the recent WTO trade barometer and UNIDO quarterly data, suggest that shifts in consumer purchasing behaviour, the shift to low carbon vehicles and other technical developments may be tempering growth prospects.
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