Sluggish UK industry data points to fall in GDP

LONDON Fri Jan 11, 2013 5:40pm GMT

The sun rises above an oil plant in Lincolnshire, northern England January 30, 2009. REUTERS/Nigel Roddis

The sun rises above an oil plant in Lincolnshire, northern England January 30, 2009.

Credit: Reuters/Nigel Roddis

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LONDON (Reuters) - Britain's economy probably contracted in the last three months of 2012, according to a batch of data and forecasts released on Friday, compounding difficulties for a government struggling to dig itself out of a deep budget deficit.

After another sluggish run of industrial output and a sharp fall in construction, the National Institute of Economic and Social Research calculated the economy had shrunk 0.3 percent in the fourth quarter of 2012. Official figures are due on January 25.

Reuters' latest polling shows a median forecast for a 0.1 percent fall in gross domestic product, though a handful of economists think the economy may eke out some growth despite the effects of the euro zone crisis and public spending cuts.

"The big picture is that the UK has stalled, it's bouncing along the bottom," said Rob Wood, economist at Berenberg Bank in London. "That's going to be the theme for the next six months or so; it's one of stagnation."

Official numbers on Friday showed industrial production grew by a slower-than-expected 0.3 percent in November, despite a strong rebound in oil and gas extraction due to the completion of maintenance on Britain's largest North Sea field.

Manufacturing output also slid 0.3 percent on the month - less than the 1.3 percent fall seen in October but also overturning forecasts for a monthly rise of 0.5 percent. Construction output sank 9.8 percent year-on-year.

All that is bad news for a Conservative-led government struggling to convince voters and economists that it can achieve solid economic growth while cutting public spending to reduce the budget deficit.

"This (NIESR) forecast is even worse than many other independent estimates, so let's hope it does not come true," said Chris Leslie from the opposition Labour Party, currently around 10 points ahead in the opinion polls.

"Unless we see strong growth in this quarter it will be clear that the last set of figures were little more than a one-off Olympics bounce." London staged the 2012 Olympic Games.

STRUGGLE

Most analysts do expect the economy to stage a modest recovery in the first quarter, and the Bank of England has seen enough signs of improvement to hold off on further stimulus for growth while inflation is well above its 2 percent target.

The more bearish the numbers get, however, the greater the likelihood that the Bank will restart its programme of bond purchases, something financial markets had seen as unlikely.

"The Bank will probably stick to their view for a while longer, but expect further stimulus in the second half of the year," said Berenberg's Wood.

Sterling declined to a nine-month low against the euro after the morning's official data - reflecting the underlying threat of a return to the quantitative easing programme which involves flooding the market with pounds.

Overall industrial output fell 0.9 percent in October. The rise in November was largely due to an 11.3 percent jump in oil and gas output that was the biggest since 1968, after maintenance of the Buzzard North Sea field was completed.

Economists had forecast a monthly rise of 0.8 percent in industrial production.

"With austerity and inflation going nowhere, the outlook for manufacturers is subdued," said Mike Rigby, who heads up UK bank Barclays' business with companies in the sector.

"However, there may be some respite with encouraging economic signs from abroad, particularly if recent reports that the euro zone woes may be bottoming out are correct."

(Reporting by Patrick Graham and David Milliken; editing by Mark Heinrich)

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