Shock manufacturing fall hits optimism on growth

Figures show sharpest output decline in 10 months, as MPC votes to keep QE on hold

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Hopes that the UK economic recovery was picking up speed were knocked sideways yesterday by official figures showing an unexpected 1 per cent fall in manufacturing output in February, the worst performance since last April when production was undermined by the Royal Wedding bank holiday and the Japanese tsunami.

Total output for the sector was also 1.4 per cent lower than a year ago, according to the Office for National Statistics. The news came on the same day that the Bank of England's Monetary Policy Committee decided to keep its £325bn programme of quantitative easing and its main policy interest rate on hold. The manufacturing numbers were a surprise because recent surveys measuring activity in the sector had shown a healthy pick-up in March, with the closely watched PMI index indicating a strong return to growth. This led some economists to cast doubt on the accuracy of the ONS figures.

"It doesn't feel right, it doesn't really go with the big grain of the surveys," said Ross Walker of the Royal Bank of Scotland. David Kern, of the British Chambers of Commerce, agreed, saying: "We believe that the business surveys give a better picture of the underlying trends in the economy."

Despite the shock, most analysts stuck with their forecasts that the UK economy will register growth in the first quarter of 2012 and that Britain will thus avoid a return to recession, defined as two successive quarters of contraction. The latest GDP estimate from the National Institute of Economic and Social Research supported this view, yesterday estimating economic growth over the three months to March of 0.1 per cent. "With such weak rates of growth the UK's negative output gap is likely to widen," said the NIESR. "But we do expect this economic weakness to be temporary, with the recovery taking hold in 2013."

The month-on-month fall in manufacturing output was driven by large declines in the rubber and plastic sectors as well as transport equipment, according to the ONS. Both are likely to have been impacted by the spike in oil prices. Overall, nine out of 14 industry sectors fell. The ONS also revised down January's manufacturing figure to show a drop of 0.3 per cent, having previously measured a 0.1 per cent rise.

The Bank of England kept its main policy rate at 0.5 per cent, where it has been for three years. Analysts are divided over whether the MPC, chaired by the Bank's governor Sir Mervyn King, is likely to vote to extend its monetary stimulus when the present round of asset purchases comes to an end in May.

"Overall the prospect of a period of sub-trend economic growth seems likely to encourage the MPC to sanction more QE next month," Philip Shaw of Investec said.

But Howard Archer of IHS Global Insight suggested that the committee would wait longer before enacting more stimulus. "We lean towards the view that the Bank of England will enact a final, smaller QE dose of £25bn, taking the total up to £350bn. However, we now think it is more likely to be delayed until the third quarter rather than occur in May, given the recent overall improved economic news," he said.