A drop in manufacturing output, a slowdown for the construction industry and a widening in Britain’s trade deficit have added to fears that the economy will struggle to eke out much growth this year.
In the latest sign that the resilience seen after last summer’s Brexit vote has waned, a trio of weaker-than-expected reports from the Office for National Statistics knocked the pound lower against the dollar and the euro on Friday. The figures also dampened bets that the Bank of England could raise interest rates in coming months.
The Bank’s interest-rate setting committee has been divided over when to lift borrowing costs from their record low of 0.25% to keep inflation in check. Much of the debate has centred around whether stronger exports and business investment can offset a slowdown in consumer spending as households grapple with higher living costs.
The latest official figures showed exports did pick up between April and May but by less than imports. That meant the trade deficit widened more than expected, tempering hopes that the pound’s sharp drop since the Brexit vote would drive a revival in exports because it made UK goods cheaper in overseas markets.
Export volumes rose 2.5% in May while imports rose an even bigger 4.8%. That pushed the deficit on trade in goods to £11.86bn in May from £10.6bn in April, wider than the consensus forecast for £10.8bn in a Reuters poll of economists.
The figures on manufacturing and the wider industrial sector, which includes utilities and mining, were all below economists’ forecasts. Output fell on a monthly basis and also on the less volatile measure of three-months on three-months.
For May alone, a drop in car production helped knock overall manufacturing output down by 0.2% from April, confounding forecasts for a 0.5% rise.
The construction sector also suffered a slowdown in May, with output down 1.2% on the month, defying forecasts for a 0.7% pick-up.
The figures follow news that the economy slowed markedly in the opening months of 2017. Business surveys since then have suggested that activity continues to rise but at a more muted pace as companies grapple with higher costs, weaker consumer spending and skills shortages.
Overall, Friday’s figures painted “a rather bleak picture for the UK economy and underline the challenges lying ahead,” said Kay Daniel Neufeld, senior economist at the Centre for Economics and Business Research consultancy.
“So far, the depreciation in sterling has not led to a significant reduction in the trade deficit … We have repeatedly stressed that the UK’s high-value-added exports are less price sensitive and that any rebalancing in the make-up of exports will take time to manifest,” he added.
“In the meantime the lack of clarity about future trading relationship with the EU – further exacerbated by the result of the general election – weighs on activity in the manufacturing sector.”
Ruth Gregory at the consultancy Capital Economics said the latest figures cast some doubt on the likely strength of a bounce-back in the second quarter after GDP growth slowed markedly in the first quarter. But she still expects growth to pick up to around 0.4% in the second quarter from 0.2% in the first.
She saw some encouraging signs in the trade figures with the three-month growth rate of goods export volumes in May outpacing growth in imports. “This suggests that net trade should make a stronger contribution to GDP growth in the second quarter,” Gregory added.
“Meanwhile, the production and construction sectors only account for around 20% of the economy, and the hard data available for the services sector so far suggests that growth has rebounded strongly after a poor start to the year.”
Economists will now be looking ahead to figures on wage growth next week to gauge how well consumers will be able to cope with higher costs. Inflation has picked up since the Brexit vote because the pound’s sharp drop has made imports to the UK more expensive. Official figures on household finances on Thursday suggested Britons had suffered the tightest squeeze on their incomes for more than five years.