Sudden drop in UK Q4 industrial production likely poses downside risk to Q4 GDP print

UK Industrial production unexpectedly dropped 1.1% in December, 0.6 percentage points weaker than Barclays' below consensus forecast of a moderate fall. All the categories posted fall, except the water and waste management output that grew slightly. Volatile components mainly contributed negatively to the December industrial production. Electricity and gas, and mining & quarrying subtracted 0.5 percentage points and 0.6 percentage points respectively. Meanwhile, manufacturing subtracted 0.1 percentage point from the print.

Industrial production, on a quarterly basis, dropped 0.5% q/q in Q4, after growing 0.1% q/q in Q3. Falls were mainly registered in all categories except manufacturing that remained flat after falling 0.5% q/q in Q3. The main components responsible for the negative contribution to industrial production are mining & quarrying that subtracted 0.3 pp from the print, and electricity & gas that subtracted 0.2pp.

The quarterly data suggests possible downside risk to the GDP growth for Q4 2015. Industrial production accounts for 15% of the UK economy. UK industrial production continues to be a reason for worry as structural lack of competitiveness remains. Overall, UK's GDP forecast to expand 0.5% q/q.