Double whammy today with the Index of Production and UK trade figures released this morning. So what are the 3 key takeaways from January’s production and trade figures?
1. Drugs are to blame for the headline reduction in manufacturing output
Manufacturing output contracted month on month by 0.9% in January 2017. While this might seem like bad news, looking underneath the headline figures reveals a considerably more positive picture. In fact, the contraction was almost exclusively down to the notoriously erratic pharmaceuticals sector, which saw output shrink by 13.5% in January. This was the unwinding of spectacular growth in pharmaceuticals output in November and December last year, with output right back where it was in September 2016.
If we exclude pharmaceuticals, output in the manufacturing sector actually increased by 0.3%. Perhaps a slightly more worrying trend is the contraction in the food and drink sector. This is something flagged up in our latest Manufacturing Outlook report, with the sector finding itself on the wrong side of the pound depreciation (as its import-intensive) and the impending slowdown in household consumption.
2. Exports are doing their bit
January was another great month for manufactured exports. Overseas sales of manufactured products increased by 2.3% compared to December 2016 and a stonking 16.9% compared to the same month a year ago.
No doubt the sterling depreciation has played an important role, especially for more price-sensitive commoditised products, but we think that it’s the pick-up in demand from our key export markets that has been the decisive factor. Recent manufacturing PMIs for the Eurozone, US and China have reached multi-year highs, while our own 2017q1 Manufacturing Outlook survey shows a steady improvement in the balance of companies noting positive demand conditions across the UK’s main trading partners.
3. Upswing in sector to be continued
The manufacturing sector looks to be in good shape at the start of 2017, carrying over the strong momentum we saw over the final months of 2016. And encouragingly it looks like we haven’t seen the end of this upswing. Manufacturers reported strong balances for q1 2017 and expect more growth in output and orders over the next quarter too.
Overall, conditions for the manufacturing sector are a far cry from what companies were reporting less than six months ago. A still supportive domestic market and the marked improvement in the external demand environment have put the sector firmly on the road to recovery.
However, the risk-filled political calendar - with EU elections, uncertainty about Trump’s policies and of course Brexit negotiations – all but ensures that this road is going to be a bumpy one. It’s therefore key that the UK Government keeps its eye on the ball over what promises to be a tense period, not least by making sure we get Industrial Strategy right.