UK's manufacturing output remains a concern

UK industrial production rebounded in August after two consecutive months of decline, rising at its fastest pace since February 2014 and overshooting expectations. Mining & quarrying output (6.0% m/m, +0.9pp contribution) was the main driver, also recording its largest rise since February 2014. 

Manufacturing helped lift production, gaining 0.5% over the month (+0.3pp contribution). Acceleration in the manufacture of transport equipment was the key growth driver, accompanied by increments in metals & basic metals and food, beverages & tobacco. Over the past year, total production improved by 1.9% y/y while manufacturing declined 0.8% y/y.

In terms of the main industrial groups, production was boosted by energy output, which rose by 4.1% m/m. Investment goods also supported the rise. Meanwhile, production of intermediate and consumer goods were down over the month.

While the August rebound is seen in manufacturing, it is important to note that this is primarily due to a particularly large August pick-up in car production, which itself is partially due to factory shutdowns occurring earlier than normal. Of concern, however, is the increasing trend weakness in manufacturing output over the past seven months, of which the last four have printed negative. 

Particularly concerning is the continued 3m/3m decline in investment goods and the potential impact this would have on economic activity if weakness were to continue or worsen, especially now on the back of non-construction fixed investment being significantly revised downward, inclusive of historical figures, in the final Q2 15 GDP release.

"All in all, this further intensifies the manufacturing downturn, with the Q3 15 carry-over now at -0.6% q/q after -0.5% q/q in Q2. Overall the sector remains a cause for concern as a structural lack of competitiveness remains, itself magnified by strong currency and government policies (fiscal consolidation and the EU referendum). It is also as expected that GDP growth moderating to 0.5% q/q in Q3 after 0.7% q/q in Q2", says Barclays.