April 6, 2011 / 9:16 AM / 9 years ago

UPDATE 2-Shock UK industrial output fall raises rate hike doubts

* Industrial output -1.2 pct m/m in Feb vs +0.4 pct forecast

* Oil and gas extraction suffers biggest fall since Aug 2009

* Factory output unexpectedly stagnates

* Casts doubt on economic upturn, rate rise timing

(Wraps in other economic data)

By David Milliken and Sven Egenter

LONDON, April 6 (Reuters) - Weak industrial output figures for February raised doubts about the strength of Britain’s economic upturn on Wednesday, confusing the outlook for monetary policy following very strong services sector numbers.

The broad figures showed an unexpected fall due mainly to greater-than-usual maintenance disruption to oil production but manufacturing also stalled, running contrary to a survey showing the dominant services sector picked up speed last month. [ID:nLDE7340MV]

BoE policymakers wavering about raising interest rates in the first half of 2011 want to see a strong rebound in first quarter GDP data later this month, due to fears that there was more behind the fall in GDP in late 2010 than just cold weather.

Added to worries about the impact of fiscal austerity which kicks in this month, Wednesday’s data almost certainly wipes out the small chance that a majority of policymakers would be convinced to move at the bank’s April meeting on Thursday.

“The fact that manufacturing output was flat means any rate hike expectations for tomorrow, or even May, are most likely dead in the water,” said Daiwa economist Hetal Mehta.

The Office for National Statistics said that industrial output contracted by 1.2 percent in February after downwardly revised growth of 0.3 percent in January. Economists had forecast a 0.4 percent increase in industrial output over the month, yet this was the biggest fall since August 2009.

Sterling fell half a cent versus the dollar and gilt prices rose, although some economists warned that the data was volatile, and may not prove decisive for the BoE.

“The data will have the effect of reducing the expected bounce in Q1 GDP,” said Brian Hilliard, economist at Societe Generale. “In that respect, they are slightly dovish but we are still looking for a rate rise in May.”

National Australia Bank economist David Tinsley said 1.0 percent quarterly growth was still possible if service sector output matched up to the expectations created by Tuesday’s PMI data, but that otherwise 0.7 percent GDP growth was more likely.

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* Graph of PMI vs output r.reuters.com/hum88r

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FEW BRIGHT SPOTS

The government and Bank of England are relying on strong export-driven industrial growth — which makes up just under a fifth of GDP — to fill the gap created by cuts in government spending and belt-tightening by consumers in 2011.

Other data on Wednesday showed a 7.9 percent annual fall in car sales [ID:nLDE7350ME] and a 2.9 percent yearly fall in house prices, the biggest drop since October 2009 [ID:nLDE7350CV].

Driving the decline in industrial output was a 7.8 percent monthly drop in oil and gas extraction due to maintenance work and production slowdowns at some sites, the biggest such fall since August 2009.

“Although this happens each year and as such is a seasonal effect, production has decreased more between January and February 2011 than it had done between the same period in previous years,” the ONS said.

Year-on-year, industrial output growth slowed to 2.4 percent, its weakest since July 2010.

The narrower measure of factory output — which does not include utilities or oil and gas extraction — was worse than forecast and stagnated in February, after January’s downwardly revised growth of 0.9 percent.

Manufacturing output had been one of the few bright spots in Britain’s economy, benefiting from a weak pound and strengthening demand from other countries.

Separate figures from the ONS on Wednesday showed that profitability in the sector reached its highest level since Q1 2008 in the final three months of 2010.

The output data was a particular surprise because PMI surveys in January and February had suggested that manufacturing was growing at its fastest pace in at least 16 years.

However, the PMI survey showed some weakness in March, with manufacturers reporting weak demand for consumer goods destined for the British market. Wednesday’s data also showed big falls in production of chemicals and in the “other manufacturing” category, which includes recycling and furniture production. (Editing by Patrick Graham)

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