December 7, 2010 / 1:03 PM / in 9 years

October factory output at 7-month high but risks seen

LONDON (Reuters) - Manufacturing output rose twice as fast as anticipated in October but wider industrial production unexpectedly fell, suggesting the pace of economic growth slowed early in the final quarter.

An unfinished van sits on the LDV production line at their plant in Birmingham, central England May 15, 2009. . REUTERS/Darren Staples

Although the pick-up in manufacturing raised hopes the sector can continue to buoy the economy, the broader weakness indicates the heady pace of growth recorded between April and September may not be sustained.

Manufacturing output rose 0.6 percent in October, according to figures from the Office for National Statistics on Tuesday, three times September’s gain and the biggest monthly rise since March.

However, sharp falls in mining, utilities and oil and gas extraction pushed industrial output down 0.2 percent on the month after September’s 0.4 percent rise, confounding expectations for a 0.3 percent increase.

The decline was partly due to seasonal adjustments and analysts said this traditionally volatile component did not alter the broader picture of an economy that is slowly becoming more balanced.

Exports have helped boost growth in the last two quarters.

Even so, financial turbulence in the euro zone, Britain’s main trading partner, and signs of slowdown elsewhere, pose risks to the recovery.

“Manufacturers have largely benefited through 2010 from healthier demand both at home and overseas, improved competitiveness in both domestic and foreign markets stemming from the weak pound and a major rebuilding of stocks,” said Howard Archer, economist at IHS Global Insight.

“(But) how well can manufacturing activity hold up as stock rebuilding draws to a close, tighter fiscal policy weighs down on domestic demand, and likely slower global growth threatens foreign demand for UK products?”

Bank of England policymakers are debating that question and Tuesday’s data did little to alter expectations the central bank will leave interest rates on hold this month and for some time to come as it weighs up the risks to the recovery.


Britain’s GDP grew 0.8 percent between July and September, according to official data, and the National Institute of Economic and Social Research think tank said on Tuesday it thought the economy had grown by 0.6 percent in the three months to November.

That compared with its estimate of a 0.5 percent rise in the three months to October and 0.8 percent in the three months to September.

The ONS said output rose in 8 of the 13 manufacturing subsectors, with the biggest gains booked in the transport, machinery and equipment and electrical and optical equipment sectors.

Analysts said October’s overall decline in industrial output was likely to be reversed in November, and that a purchasing managers’ survey of manufacturing for that month indicated the sector would continue to enjoy solid growth.

However, the outlook for next year and beyond is foggier, with domestic consumer demand likely to be hit by a rise in value added tax, muted wage growth and public sector job cuts.

Separate figures on Tuesday indicated the Christmas shopping season got off to a slow start, with Britons worried about their finances and job prospects.

“For now, it looks like industry is in a good position to help to offset some of the effects of the looming squeeze,” said Vicky Redwood of Capital Economics.

“But as we have warned before, the sector is not big enough on its own to keep the overall economic recovery going as the public and consumer sectors retrench.”

Editing by John Stonestreet/Ruth Pitchford

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