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Economy in Brief

UK Industrial Production Takes Unexpected Fall in October
by Carol Stone December 6, 2006

UK industrial production declined unexpected in October, falling 0.8% compared to +0.1% forecast by a couple of consensus surveys of economists. The manufacturing sector was off 0.5%, in the face of an expected 0.2% increase. A number of factors accounted for the retreat.

Total output was pushed down by a renewed decline in oil and gas extraction. The UK's oil production has been falling for several years, but had managed a bounce in September. This was more than reversed in October. Utility output continued a decline, which was quite large in October and attributed by some to unusually mild weather.

Manufacturing, the key cyclical sector, saw a 0.5% decrease in production. Press reports argued that the strength in the pound over the last several months was starting to hurt exports. This is possible, as seen in the accompanying chart. Machinery seems to be the main broad area showing weakness and that could relate to non-competitive pricing conditions in world markets. The same is true for pharmaceuticals. However, in several of these instances, output had been up in prior months, so a downturn in one month is hard to blame on such fundamental factors, especially for items like machines that have fairly long lead-times. Note too that the relationship of British manufacturing to the currency value is quite loose. So until there's more evidence, it seems too soon to decide firmly on a cause for this sudden downdraft in industry. In fact, the ONS's preferred measure, the last three months average compared with the prior three months average, was still rising, by 0.3%. This is considerably less, though, than the 0.8% or 0.9% of the other recent periods

UK Oct 2006 Sept 2006 Aug 2006 Year Ago 2005 2004 2003
Total, 2003 =100 98.2 99.0 98.9 97.6 99.0 100.8 100.0
  % Change -0.8 0.1 0.0 2.1 -1.8 0.8 -0.3
Oil & Gas -2.6 2.1 -1.9 -11.3 -9.9 -8.4 -5.6
Manufacturing, 2003=100 102.3 102.8 102.8 99.9 101.0 102.0 100.0
  % Change -0.5 0 0.3 4.8 -1.0 2.0 0.2
Electricity, Gas, & Water -3.1 -0.3 -0.6 -4.3 -0 1.1 1.6
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