Industrial output increased significantly in May, driven by manufacturing and energy production. This “good news” should be interpreted with caution, however, as the extra working day during May would have boosted production. Industrial output rose significantly more than expected, by 1.0% m/m (consensus: -0.2%, Barclays: 0.3%). Mining and quarrying output was flat in May, while the energy component of IP increased by 2.4%, as an increase in electricity supply more than offset the fall in gas supply.
Manufacturing output growth was even stronger than our above-consensus forecast, rising by 1.2% m/m (consensus: -0.1%, Barclays: 0.9%), driven by the production of transport equipment and food. The less volatile 3m/3m measure, however, fell by 0.2%. This measure has now suggested falling manufacturing production since September 2011, indicating a weak underlying trend in manufacturing output beyond the volatility of the monthly growth rates. Furthermore, the performance of manufacturing output is at odds with the manufacturing PMI survey, which suggested a significant fall in production for the same month (see chart). Despite the strong reading in May, we expect manufacturing output to fall again in June and to be subdued during Q2 as a result of the negative impact on output from the June bank holiday weekend, as well as the demand weakness at home and abroad.
The May IP release shows output growth was stronger than expected during the month, although we expect this gain to be largely reversed during June. We think that it will be difficult to gauge the underlying strength of the industrial sector during Q2 and Q3 as we expect the dynamics of production in this period to be affected by the extra bank holidays in June (owing to the Queen’s Jubilee). We expect IP to fall significantly in Q2 and to rebound in Q3, and beyond that, we expect to see a measured recovery in the sector. From the performance of the industrial sector in recent quarters, it appears that the hoped for manufacturing driven recovery is not likely to materialise in the near term. Furthermore, the rebalancing of the economy towards export-driven manufacturing seems increasingly unlikely as long as demand from the UK’s main trading partners remains subdued.
Barclays Capital