IP Data
UK industrial production has weakened noticeably since the start of the year and, although this has mainly reflected trends in extraction industries, manufacturing production has also grown little since January. As the ONS only adjusts for regular seasonal holidays, and not for additional bank holidays such as that for the Royal Wedding, April’s data have the potential to show quite a significant decline. Indeed, assuming a constant stream of production, the loss of one working day out of a usual 20 would imply a decline in manufacturing production of 5%. Evidence from the Queen’s Silver and Golden Jubilees suggests that the actual impact may, if anything, be slightly greater than this, and so we look for a decline in manufacturing output of 5.5% m-o-m. This would take the annual rate down from 2.7% to -2.1%. The impact of an additional holiday on extraction and utilities output is, however, less evident. Complicating matters further in the case of utilities is the unseasonably warm weather seen over the month, which could well have reduced output in this area owing to a lower necessity for heating. However, again, evidence from previous warm April periods (for example 2009, 2007 and 2003) gives no clear indication of the likely trend, with monthly changes ranging from modest growth of 0.7% in 2003 to a sharp reduction of 4.3% in 2007. Assuming reductions of c3% in both extraction and utilities output during April, overall industrial production falls by 4.9% with the annual rate easing from 0.7% to -3.6%.
PPI
Trends in producer prices, particularly input prices, have been largely driven by oil and petroleum in recent months, and this trend may well have continued in May. However, while oil prices have had significant upward effects in recent months (for example contributing more than 2pp to the 2.6% increase in April), a c6% decline in the sterling oil price should mean that the reverse is true in May. The lower oil price should offset further increases in other imported material prices within the input prices series, and so we expect input prices to be broadly flat on the month and to remain 17.6% higher on an annual basis. The decline in oil during May could, however, take a little longer to pass through to lower output prices of petroleum. Therefore, we expect a rise in output prices of 0.4% m-o-m, which would take the annual rate up slightly from 5.3% to 5.4%.
HSBC Global Research