Pound slides on shock fall in factories’ output

Manufacturers registered a surprise slump in output in May

The biggest monthly dip in manufacturing output for 16 months has cast doubt on the strength and breadth of the UK’s economic recovery.

Output fell by 1.3 per cent in May, official statistics showed, well below the 0.4 per cent expansion that economists had expected and the weakest figure since January last year. The wider measure of industrial production was also 0.7 per cent lower than in April.

The news immediately depressed sterling. The pound fell 0.5 cents against the dollar, to $1.709, as analysts warned that gross domestic product growth might not accelerate in the second quarter of the year. However, the National Institute of Economic and Social Research estimated that the economy grew by 0.9 per cent in the second quarter. If confirmed, that would represent the most rapid quarterly growth since 2010.

The latest survey by the British Chambers of Commerce, covering the second quarter, also cast doubt on the momentum of the manufacturing recovery. Although it showed that firms achieved their strongest domestic sales growth since the survey began in 1989, it also reported that exports and investment had eased since the first quarter. “Unless investment and net exports make bigger contributions to growth the recovery could stall,” warned David Kern, of the BCC.

Mike Rigby, of Barclays, said the possibility of an early interest rate rise could be prompting some companies to hold back on spending. “Manufacturers are increasingly seeking clarity on this key decision as they consider raising their levels of investment,” he added.

The official manufacturing numbers were in sharp contrast to the Markit/Cips survey of the sector for May, which gave a reading of 57, well above the 50 mark that separates growth from contraction. No single manufacturing sub-sector was responsible for the monthly decline, with the Office for National Statistics reporting falls in production of metals, pharmaceuticals, computer, electronic and optical products.

With trade-weighted sterling up 14 per cent in a year, Samuel Tombs, of Capital Economics, warned: “The stronger pound might be starting to slow the recovery in the manufacturing sector.”

He added that unless output bounced back strongly in June, manufacturing growth in the second quarter would be lower than in the first.