June 10, 2011 / 9:16 AM / 8 years ago

Royal Wedding and Japan quake weigh on industry

LONDON (Reuters) - Factory output fell at its sharpest monthly pace in around two years in April, hit by an extra holiday for the Royal Wedding and supply chain disruption from Japan’s earthquake, and suggesting the economy made a lacklustre start to the second quarter.

MG6 cars sit on the production line at the MG Longbridge factory in Birmingham, central England April 13, 2011. REUTERS/Darren Staples

The weak output data, together with news of a sharp slowdown in factories’ input costs in May and a survey showing public inflation expectations fell for the first time in more than two years, reinforced the view that interest rates will stay on hold for several months to come.

The Office for National Statistics said industrial output fell 1.7 percent in April, confounding the median forecast for a rise of 0.1 percent, and the biggest fall since August 2009.

The narrower measure of manufacturing output — which does not include utilities or oil and gas extraction — dropped 1.5 percent in April, the steepest fall since January 2009.

Economists have cautioned that the unusual combination of an extra holiday, late Easter and record warm weather April would make it difficult to forecast data and to assess the state of the economy throughout the second quarter.

This uncertainty was reflected in the broad range of forecasts for the April industrial output figures, which ranged from a rise of 0.7 percent to a drop of 5 percent on the month.

Many investors had been positioning for a weak reading and gilt futures trimmed some of their early gains. Sterling initially fell to a session low against the dollar and the euro after the data, but quickly recouped most of those losses.

“It is difficult to interpret the current underlying trend in the sector from these figures, but there is plenty of evidence that growth is continuing to moderate,” said Hetal Mehta, economist at Daiwa Capital Markets.

“We certainly do not expect manufacturing to make as big a contribution to GDP growth in Q2 as in Q1,” she said.

Manufacturing has been a driving force of Britain’s economic recovery, benefiting from a past fall in the pound and robust demand from other countries. But recent surveys have indicated the sector may be running out of steam.

Nonetheless, Prime Minister David Cameron insisted on Friday that the government was following the right course of action to rebalance the economy.

“You are moving from one sort of economic model to a new sort of economic model, but I believe we are seeing that rebalancing, we are making progress, but it is going to be choppy and there will be good months and bad months,” he said in a interview on the ITV television channel.

PRICE PRESSURES EASING

The Bank of England left interest rates at 0.5 percent on Thursday, as signs of a slowdown in some of Britain’s main trading partners and weak domestic demand outweighed concerns about persistently high inflation.

And there was some good news on the inflation front on Friday.

The Bank’s May inflation attitudes survey showed that average public inflation expectations for the next 12 months fell for the first time since February 2009, dropping to 3.9 percent from 4.0 percent in the February 2011 survey.

The figures are likely to reassure the BoE that inflation expectations are not rising at a time when headline inflation has increased to a two-and-a-half year high of 4.5 percent, reducing the chances of an entrenched wages-price spiral.

Separate data from the ONS showed factory gate inflation eased in May, as manufacturers’ input costs fell at their fastest monthly pace in two years.

Producer output price inflation eased to 5.3 percent in May from an upwardly revised 5.5 percent in April.

Other figures on Friday also suggested the economy made a weak start to the second quarter after growing by just 0.5 percent in the first three months of this year.

Construction output, which was one of the biggest drags on growth in the first three months of this year, fell by 13.8 percent on the month in April, according to unadjusted data published by the ONS.

The ONS did not quantify the impact of the extra holiday or the other one-off effects in April. But it said car manufacturers had been hit by supply chain disruptions caused by Japan’s earthquake and Tsunami in March. Record warm weather in April caused a sharp monthly drop in utilities output.

Editing by Ruth Pitchford/Toby Chopra

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