August 6, 2010 / 8:38 AM / 10 years ago

June output surprises with fall

LONDON (Reuters) - Industrial output fell unexpectedly in June, although officials stressed the drop was due chiefly to an early start to seasonal oil field maintenance and would not change initial estimates for gross domestic product.

Workers are seen on the production line at Nissan car plant in Sunderland, northern England, June 24, 2010. REUTERS/Nigel Roddis

The Office for National Statistics said industrial output fell 0.5 percent in June, partially reversing May’s 0.7 percent rise and confounding forecasts for a 0.2 percent increase. Sterling fell half a cent against the dollar in response.

The ONS said the main reason for the fall was a 6.0 percent drop in oil and gas output, its biggest monthly fall since last August. The decline in oil and gas extraction was due to maintenance work being carried out in June, rather than in August when work on oil fields is normally done.

The office said Friday’s data would not lead to any revision of the Q2 GDP figures, which showed growth of 1.1 percent for the economy as a whole. The 1.0 percent quarterly rate of growth reported by the ONS was the same as the estimate used in last month’s preliminary GDP data.

But that provided little comfort to investors who are worried that Britain will find it hard to sustain an economic recovery amid massive government spending cuts, weak demand from Europe and tight credit.

The pound fell as markets speculated that the Bank of England would be in no hurry to raise interest rates after leaving them at their record low 0.5 percent on Thursday.

“The suspicion going forward is that manufacturing will lose momentum,” said Howard Archer, economist at IHS Global Insight.

“There are hints that the second quarter may have been the peak of manufacturing activity. And certainly the inventory adjustment will probably soon come to an end.”

PRICE EFFECTS

Manufacturing output also rose less than expected in June, by 0.3 percent, the same as in May. And the slowdown in July’s Purchasing Managers surveys this week suggested a further easing.

“Survey and gross domestic product data implied more than double this pace, so that’s disappointing,” said Alan Clarke, economist at BNP Paribas.

Nonetheless, eight of the 13 manufacturing sub-sectors recorded increases, with the main rises being in the food, drink and tobacco; chemical and man-made fibres, and metal and metal products sectors.

The ONS also published data showing that annual factory gate inflation slowed less than expected in July to 5.0 percent from 5.1 percent, after a monthly rise in food prices outweighed a drop in petrol costs.

And food prices may have further to rise given Russia’s ban on wheat exports, which pushed U.S. wheat futures prices up to a 23-month high.

Input price inflation picked up much less than expected, however, at a rate of 10.8 percent from 10.7 percent in June.

Analysts had expected producer output price inflation of 4.9 percent and input price inflation of 11.4 percent.

“Some price stickiness persists at the factory gate, but the more broad-based easing in input cost pressures should provide some reassurance,” said Ross Walker, economist at RBS.

Editing by Patrick Graham

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