The continuous run of positive post-referendum data has experienced a break, as the UK’s industrial production falls in August and imports increase faster than exports, widening Britain’s trade deficit.
Industrial production fell 0.4% in August, compared with a 0.1% in July, driven by a sharp 3.7% decrease in mining and quarrying activity, said the Office for National Statistics.
The monthly fall in industrial production implies that the industrial sector output will drop in the third quarter.
However, the economy still appeared to weather the Brexit vote better than most expected in Q3, as manufacturing output rose by a monthly 0.2%, reversing part of the 0.9% drop in July. This suggests the hit from the Brexit vote wasn’t that long-lasting.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics predicted that industrial production is likely to fall further in September. He highlighted that the owner of the Buzzard oil field, which account for 12% of total oil production, moved a scheduled shutdown to September from July.
He said: “In addition, the unusually mild weather in September—the average temperature was two degrees above its long-run average—will greatly depress demand for heating energy.
“As a result, industrial production looks set to fall by about 0.2% quarter-on-quarter in Q3. Thankfully, however, strong increases in services output in June and July suggest that GDP growth won’t slow too sharply in Q3; we still expect 0.5% growth.”
In a separate set of ONS figures, the trade deficit widened in August from £2.5 billion to nearly double at £4.7 billion due to the value of imports rising by 5.5% and exports rising at a far slower pace of 0.1%.
The deficit on trade in goods alone widened by £2.6 billion to £12.1 billion, despite hopes that the weaker pound would increase the demand for British goods.
The volume of goods exports in August was 1% below its average in the first seven months of 2016.
Mr Tombs said: “Volumes are broadly flat because exporters have responded to the drop in the exchange rate by raising their sterling prices by 11.5% year-over-year. Exporters are widening their margins, rather than seeking to increase market share, just as they did when sterling depreciated in 2008.
“Admittedly, barring erratic movements in September, net trade looks set to make a small 0.2 percentage points or so contribution to quarter-on-quarter GDP growth in Q3, because import volumes are on track to fall slightly. But this pales by comparison to the 0.8 percentage points drag on GDP growth from net trade in Q2.”
Mr. Tombs noted that sterling depreciations in the past have taken up to two years to boost net trade, because it takes time for contracts to be renegotiated and given the recent uncertainty about the future of trade in the UK, there are doubts surrounding whether the restructuring of the economy towards exports will be faster this time around.
Scott Bowman, UK economist at Capital Economics, said: "While these figures break the recent run of positive data for activity in the third quarter, the overall strength of recent data has probably lowered the chance of further monetary easing from the MPC.
"But committee members have previously warned against over-interpreting incoming data...so we still think that there is a decent chance that the bank rate will be cut to 0.10% in November."
