U.K. manufacturing sector performs strongly in December, trade balance deteriorates

The U.K. manufacturing sector recorded a strong performance in December 2017, with factories buoyed by the subdued exchange rate. Construction output also grew in the month; however, it continues to weigh on the economic growth in the fourth quarter. Meanwhile, the trade deficit widened, but exports were growing at a stable rate.

The Office for National Statistics indicated that manufacturing output rose 0.3 percent in December, rounding off a strong quarter in which factory production rose 1.3 percent. Output has now grown for eight consecutive months, which is the longest continual growth spell for nearly three decades.

“However, some caution is also warranted as, after the 0.2% November rise, the latest increase was the second-weakest since last April, hinting at a slower growth momentum which has also been indicated by the business surveys”, noted Chris Williamson of IHS Markit.

In the meantime, the wider measure of industrial production, which includes extraction and energy, dropped 1.2 percent in the closing month of the year, up only 0.5 percent in the fourth quarter. Oil and gas extraction dropped 24.2 percent because of a temporary pipeline shutdown. Thus a recovery might be seen in early 2018.

The construction sector output rose 1.6 percent following a flat November. However, the rise of activity in December was not able to avert the building sector recording a decline of 0.7 percent in the fourth quarter as a whole.

Meanwhile, on the trade data front, the deficit widened to GBP 4.9 billion, its highest since September 2016, with the goods deficit also up to a 16-month high at GBP 13.6 billion. Exports rose just 0.2 percent in the three months to December, while imports grew 2.5 percent. Increase in oil prices mainly led to the widening of deficit.

Looking ahead, survey data implies additional manufacturing momentum was lost at the beginning of 2018. The IHS Markit/CIPS Manufacturing PMI dropped for a second consecutive month in January, down to a seven-month, implying the rate of growth has decelerated to one of the most subdued since the EU referendum in 2016, stated Williamson. The survey responses show that disappointing domestic demand seems to have been the main cause of decelerating manufacturing growth.

Manufacturing is expected to make a much lower effect on economic growth in the first quarter of 2018. Furthermore, output growth is likely to slacken further in February as a reduced inflow of new work into factories signified backlogs of orders drop for the first time in three months in January.

Meanwhile, strong export growth is expected to be sustained in months ahead. The export growth in U.K. have accompanied along with a noticeable rise in the euro area economy.

“While today's data suggest that the economy grew by 0.5% in the fourth quarter, in line with recent ONS estimates, the survey data are indicating a growth rate of just 0.3% at the start of 2018. If this slowdown is confirmed in coming months, the case for a May rate hike will start to look much shakier”, added Williamson.

At 16:00 GMT the FxWirePro's Hourly Strength Index of British Pound was neutral at -48.7521, while the FxWirePro's Hourly Strength Index of US Dollar was slightly bullish at 66.4162. For more details on FxWirePro's Currency Strength Index, visit http://www.fxwirepro.com/currencyindex

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