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U.K. manufacturing output increased for a second month in a row, while maintenance work in the oil fields dragged down industrial production in June. Output price inflation eased slightly in July suggesting easing inflationary pressures.
Manufacturing output rose 0.3% month-on-month in June, unchanged from May, figures released by the Office for National Statistics showed Friday. It was slightly slower than the expected 0.4% increase.
While the manufacturing sector's performance this year is pleasing, there is no room for complacency, said David Kern, chief economist at the British Chambers of Commerce. "The recovery is not yet secure, and we are now seeing worrying signs that the global economy is slowing down."
Output increased in eight of the 13 sub-sectors, with four sub-sectors decreasing and one being flat. Industries that made large positive contribution to overall output were the food, drink and tobacco industries, chemical and man-made fibers industries and the basic metals and metal products industries. Meanwhile, the largest negative contribution to overall output came from the electrical and optical equipment industries, the ONS said.
Chiara Corsa at UniCredit Research expects manufacturing output growth to start slowing, though not dramatically so, as flagged by different surveys of the manufacturing sector. In the second half of the year, GDP growth should decelerate from the peak recorded in the second quarter, the economist added.
On an annual basis, manufacturing output increased by 4.1%, in line with economists' expectations. That compared with the revised 4.2% rise in May.
Manufacturers benefited through the first half of 2010 from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound, and leaner stock levels, noted IHS Global Insight economist Howard Archer. But, manufacturers are likely to see growth to moderate over the months ahead.
Recent surveys suggest that the third quarter GDP growth will be weaker than in the second quarter with the service sector losing growth momentum. The Purchasing Managers' Index for manufacturing dropped to 57.3. Meanwhile, British industry body EEF forecast manufacturing to expand 3.8% this year, faster than the 1.1% expansion seen for the economy as a whole.
Largely due to a fall in oil and gas extraction, overall industrial output decreased by 0.5% between May and June, missing the forecast for a 0.1% increase. It followed a 0.7% rise in May. Compared to the previous year, overall industrial output in June was 1.3% higher. But, growth eased from May's revised 2.5% and was smaller than the 1.9% consensus forecast.
The ONS said there are no revisions to GDP growth figure published on August 27 as the increase in production was 1% in the second quarter as included in the quarterly national accounts calculation. Preliminary estimates showed that the British economy expanded by 1.1% in the second quarter.
Mining and quarrying output decreased 5.7% from May with a decrease in oil and gas production output of 6%. The monthly fall in oil and gas extraction was due to earlier than usual maintenance on oil fields. The work was carried out in June, while it is usually undertaken in August. Energy supply output increased 1.2% on the month with increases in electricity and water supply output.
Separately, the ONS said output prices rose 5% in July from the previous year. July's annual growth was bigger than the expected 4.9% increase, but down from prior month's 5.1%. Month-on-month, output prices edged up 0.1%, reversing a 0.3% fall in June. Economists were expecting output prices to remain flat.
Producer price inflation is expected to ease over the coming months as energy effects weaken and activity in the sector starts to slow, Jonathan Loynes, an economist at Capital Economics. "While the industrial sector is currently acting as a useful driver of overall economic growth, we don't see it is a source of strong inflationary pressure," he noted.
Excluding volatile food, beverages, tobacco and petroleum prices, core output price inflation was 4.7%, down from 5% in June. Core inflation exceeded an expected 4.5%. Monthly core inflation was 0.2%, faster than the expected 0.1%.
"The producer output price data are reasonably reassuring for the Bank of England," said IHS Global Insight's Archer. The economist said the central bank will probably see the July producer price data as further evidence that inflationary pressures are gradually easing.
The input price index for materials and fuels purchased by manufacturing industry rose 10.8% in July from the prior year. Input price annual inflation was 10.7% in June. Consensus forecast was for an 11.4% increase.
On a monthly basis, input prices dropped at a faster pace of 1%, following a 0.3% fall in the previous month. The fall in the input index between June and July mainly reflected falls in the price of crude oil, home produced food products and imported metals.
Yesterday, the Bank of England left its key interest rate unchanged at 0.5% and maintained the size of the quantitative easing at GBP 200 billion. Despite an acceleration in economic growth, policy makers are cautious about the sustainability of recovery.
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