An expected contraction ahead of the MPC meeting

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Today the Office for National Statistics released March data for the so-called “short-term statistics”. With so many sunny days in the last week, it seems weird to talk about bad weather and if this had a clear impact on production.

Manufacturing contracted again but this is not time for drama

As expected manufacturing contracted by 0.1% in March following a 0.2% contraction in February. After such a long period of expansion, this is not time to despair and we should also consider that manufacturing output actually expanded by 2.9% when compared to March 2017.

Overall manufacturing expanded by 0.2% in the last three months and gave a small but positive contribution to the weak GDP growth of the first quarter of 2018.

Last month, the ONS pointed out how the February contraction was not massively related to bad weather and this month they are suggesting that again: “There was no evidence to suggest that the recent snow and adverse weather conditions had any negative impact on manufacturing”.

On the other hand, the ONS confirmed that weather had a clear impact on energy supply which expanded by 2.5% in Q1 and allowed industrial production to expand by 0.6%.

 

Contraction for many, but not for everyone

The subsector picture, as always, is quite heterogeneous with results across the entire spectrum.

The top two performers in Q1 were again electronics and mechanical equipment which respectively expanded by 4.4% and 4.1% continuing their vertiginous upward trend started a year ago.

On the other side of the table we can find electrical equipment which had a terrible quarter at -8.9%. The sector is a construction supplier and is probably suffering from the weaknesses of builders.

 

 Q1_2018_subsectors 

 

Bad weather, Carillion, and Brexit uncertainties keep hitting construction

Construction has experienced some terrible 12 months and was the biggest drag to GDP growth in the first reading for 2018. Construction, which in this case was definitely influenced by bad weather, declined by 2.3% in the month and it has overall contracted by 4.9% in the last 12 months. The weakness was experienced across the board with each subsectors declining in the quarter with the exception of private industrial construction.

 

A bounce back in April is expected, but PMIs are not pointing to a rosy picture

If a couple of months of contraction are not the end of the world (even more when associated to exogenous factors such as weather), some more concerns may arise if April data turn out weak.

Unfortunately at this point in time we can only rely on “soft data”, namely survey data.

Manufacturing PMI was one point down in April, even if still in positive territory (53.9). PMI for construction jumped back over the 50 threshold but considering how hard the contraction was during these last months, a reading of 52.5 is not jubilant news. PMI for services was also not great at 52.8 after a sluggish 0.2% expansion in the first quarter of the year. Moreover, some other indicators, such as the BRC monitor, pointed to sluggish retail sales growth in April.

 

These are all the data we have, now it’s MPC time

At Midday today, the MPC will decide whether or not to raise the Bank rate.

To know more about it and to have an idea if a rate increase is a good move, you can check Martyn’s blog here (remember to also take a look to his great slide deck!).

Hurry up, you may still have some time!

 

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