8th July 2014 by Shaun Richards
Today has seen an event which has caught both investors and economists on the hop somewhat so let us take a look at what has happened. At 9:30am the Office for National Statistics released this data.
Total production decreased by 0.7% between April 2014 and May 2014. Manufacturing was the largest contributor, decreasing by 1.3%.
These numbers are something of a blot on the landscape of the UK economic recovery theme. They also reinforce other countries disappointing May production data although they are at least an improvement on the 1.8% monthly production fall reported by Germany yesterday and the 3.2% fall reported by Sweden last week. Let us hope that there is not a gathering trend there.
If we look deeper into the numbers we see that the falls in manufacturing were fairly widespread.
The main contributors to the decrease in manufacturing were basic metals & metal products; basic pharmaceutical products & pharmaceutical preparations; and computer, electronic & optical products.
The manufacturing numbers were so weak in May that they would have driven production even lower but for some offsetting components. In a set of figures which opened in a rather contradictory fashion I raised a wry smile at this being a positive influence.
and (an increase) of 0.8% in mining & quarrying output, which contributed 0.1 percentage points to total production.
Actually oil and gas output was up by slightly more at 0.9% on a monthly basis. Wasn’t it supposed to be falling?
The Purchasing Manager’s Index (PMI) was rather wrong-footed
By contrast the Markit PMI had told a very different tale to the official data.
May saw the UK manufacturing sector maintain one of its brightest spells of output and new order growth in the 22-year survey history.
As you can clearly see there is quite a gap between “one of its brightest spells” and a 1.3% monthly fall! But in fact the PMI message went on.
Manufacturing production is currently expanding at a quarterly rate close to 1.5%, according to the PMI, helping the sector take huge strides towards recouping the output lost during the recession.
As it happens they repeated this message for June as we are left wondering what to expect from that now. One thing we can say for sure is that the PMI report explicitly gave us a different answer to that of this morning’s official data.
Manufacturing production increased for the fifteenth successive month in May, reflecting improved order books and stronger economic conditions.
I am reminded of when this happened in Ireland when the “pharmaceutical cliff” impacted strongly on manufacturing production when the business surveys had been very positive. The cause was that each company counts as one vote regardless of size and a very large company has reduced production (of an anti-cholesterol drug if I recall correctly) substantially but was only one down vote. It is possible that something similar has happened in the UK. As to a literal direct cause I am not so sure, but it may be worth pointing out that the pharmaceutical industry is 9% of UK manufacturing production.
The British Chamber of Commerce
The BCC had warned about a slow down in the rate of economic growth in the second quarter of 2014 earlier today. This is their overall view on the UK economy.
Most key balances show falls in Q2 2014 when compared to the unusually strong Q1 figures.
Somewhat worryingly in the light of today’s data, they had more concerns over a slow down in the services sector than the manufacturing one.
In services, there were no balances at their all-time highs in Q2, compared with two service balances at their all-time highs in Q1 (export sales and orders).
Interestingly we also got a little more insight into the behaviour of wages in the UK.
wage pressures weakened (services down five points to 18% and manufacturing down six points to 22%).
Again this is hard to compare with the official figures which as they have recorded no wage pressure accordingly cannot have a reduction in them!
Taking a longer perspective
If we look back to May 2013 then the comparison is much more comfortable than the monthly ones discussed above.
Production output increased by 2.3% between May 2013 and May 2014. There were increases in two of the main sectors, with manufacturing being the largest contributor, increasing by 3.7%. Water supply, sewerage & waste management increased by 2.3%.
So the overall position remains positive just less positive than we were previously led to believe. This is reinforced by the rolling three month average which shows manufacturing output to be up 1.1% on the preceding period. However we are further away from doing something about this.
In the three months to May 2014, production and manufacturing were 11.3% and 7.2% respectively below their figures reached in the pre-downturn GDP peak in Q1 2008.
The UK is of course far from unique in finding itself in a situation where the fall in output in these areas is starting to look ever more permanent. But the optimism that we were at least in a catching up phase has faded a little perhaps with today’s numbers. The shift to output in the services sector has gains for the economy but I note that the shift is accompanied by weak wage growth. How much of our future will see this sort of pattern?
We find one more time that our economic statistics cannot stand the pressure being applied on them in these uncertain times. They are simply not accurate enough on a monthly basis and so we find ourselves if not in the dark in fading light. In such a technological era one might reasonably think that we would know production figures the day after the month ends as the computer readouts get combined, but apparently not! They remain volatile and unreliable, which leaves us with the conclusion that the UK economy may just have slowed but we cannot be entirely sure. So far for May this looks to be something of an international issue.
Later today we get the latest monthly economic growth estimate from the NIESR (National Institute for Economic and Social Research). Last month they suggested that the UK is growing at a quarterly rate of 0.9%. Whilst production is only 15.1% of the UK economy these days, today’s numbers are likely to lead to a downgrade of that rate of growth. But one thing we can be sure of is what David Bowie called.
As whilst they record overall output as having returned to pre-crisis peaks we know that manufacturing is 7.2% below and manufacturing is 11.2% below. Also real wages have had similar falls with the exact size depending on the inflation index you lose.
One of my earliest themes is in the new today as I note this from the news section here and just as a reminder the Bank of England Base Rate is 0.5%. This is the interest-rate charge on paying car insurance by monthly installments.
The average interest rate across all 34 insurers in the scenario run by Fairer Finance was 29.7%.