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Economy in Brief

U.K. Manufacturing Output Drops Sharply
by Robert Brusca  January 13, 2020

U.K. manufacturing industrial production dropped by a sharp 1.7% in November. It was the largest drop since April when manufacturing output fell by an outsized 4.2%. On data back to January 2015, this is the second largest monthly drop in manufacturing IP on record.

Perfect storm
The November industrial output drop is a 'perfect storm' of companion declines in consumer durables, consumer nondurables, intermediate goods and capital goods output all in the same month. This is only the third time that all these sector output gauges fell in the same month since January 2015.

Continuing weakness
The November weakness comes on the heels of a 0.6% gain in output in October that was the strongest rise since February. The October output gain saw increases in three of these four sectors with intermediate goods being the lone declining sector. The sharp decline in output in November given the October rebound has all the trappings of a return to trend rather than as an indication of newly stepped up weakness.

IP is truly weak
The chart (above) of IP plotted vs. the Markit manufacturing index for the U.K. tends to confirm this observation as both the Markit survey and the IP index ran hotter in October outpacing recent performance at that time with the November observation subsequently falling more in line with the results from earlier months. IP is carving out a low that is close to the lows of late-2018 and of 2016 and 2015 whereas the weakness in the Markit manufacturing index over recent months has been setting new low values on this timeline.

Extremely weak monthly GDP in the U.K. in November

Weak GDP, too
As the manufacturing sector shows a great deal of weakness, the U.K. monthly GDP metric is weak as well, showing a decline on the month on what is being recorded as weak service sector output on top of a drop in manufacturing output. The chart (on the left) plots the monthly GDP gauge as a 12-month growth rate. On that basis, the end of year weakness also is pronounced but does not stoop to contraction.

A silver lining...
However, all is not negative for the U.K. economy. U.K. financial services firms recorded improved sentiment for the first time in 12 quarters in the just released Confederation of British Industry (CBI) survey. The survey of 94 financial institutions including banks, insurers and investment management firms logged a long-awaited improved reading in December. The survey was conducted in mid-December just prior to the British general election. The sweep into office of the Conservatives should help to set a condition of greater certainty ahead, especially as regards Brexit and its adjustment process. Importantly, the survey showed that job growth in the sector remains positive in the wake of outflows of jobs created by the Brexit process. Employment growth is still expected to pick up.

Challenges ahead for manufacturing
The manufacturing sector still shows substantial challenges ahead. Even if the Brexit process is more certain as to what it will be and to its timeline, the transition could still prove to be disruptive as firms will have to prepare for and adjust to new trading arrangements. Two months into the fourth quarter, manufacturing output is falling at a 3.3% annual rate. There are net quarterly declines in progress in three of the four sectors with consumer durables being the only exception. Some industrial detail shows that in the quarter food, drink & tobacco sector output is still rising as is the output of utilities for electricity, gas and water. However, industrial mining & quarrying output is contracting strongly and the manufacturing sectors of textiles & leather and motor vehicles & trailers are showing hard declines of their own.

Stepping out into the New Year
Globally, growth is still struggling. The best news we have had so far is on the U.S.-China phase-one trade deal which is set to be signed around mid-month. The Chinese translation of the agreed document has been prepared and we are told that none of the provisions has been 'lost in translation,' a real risk after what had transpired around mid-year last year. So it would appear that the signing of the deal will move ahead. However, ongoing geopolitical challenges still haunt the outlook with Hong Kong still seeing disruptive protests. The election of a more independence-oriented party in Taiwan has put a chill on China-Taiwan relations. Meanwhile, anti-government protests in Iran have stepped up and continue in the wake of Iran's admission that it shot down the Ukraine airliner with many Canadian citizens and residents on board by mistake. 2020 is having a rough start with uneven economic statistics and a rough ride on the geopolitical front. The U.S. contribution has been a December job report with more modest job growth and more modest wage pressure than what had been expected. It is a reminder that forecasting is a dodgy business even with great effort put into the process.

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