U.K. IP Shows Mixed Trends

U.K. manufacturing industrial output rose in February by 0.9%, marking back-to-back increases averaging 1% per month for two months in a row. Headline manufacturing growth shows acceleration in progress from 12-months (0.6%) to six-months (1.7%) to three-months (5.5%).

This is a robust pick up in the output trends of one year and less for IP expansion. But the year-on-year trend has showed declines in seven of the eight previous months. With the February report, the year-on-year change is positive at 0.6%; it is also modest. The question here is whether the year-on-year trends turn and whether the under-one-year trends are authentic trends that can last and reverse nearly three quarters of a year of declining output. Consumer durable goods, nondurable goods, intermediate goods and capital goods all show accelerating trends in IP for one year and under.

The graph plots year-on-year rates of growth; it shows trends slipping for capital goods and for consumer durables, but there is some stabilization for consumer nondurables. Since nondurables are the less cyclical than durables, the stability in nondurables is a hopeful sign for a more even-keeling future.

Another encouraging sign is that with two months into the first quarter, the quarter-to-date growth rates for all of these sectors are positive and all show substantial strength except capital goods.

That brings to the big question about the United Kingdom. GDP is estimated to have risen by 0.5% in January and slowed to a 0.2% gain in February by the Office for National Statistics. And as growth slows down, industrial output is showing signs of speeding up. The problem, of course, is Brexit. And the weakness in capital goods output is one of the real red flags since firms do not generally want to invest until they know the lay of the land in the future. And with Brexit and concerns about what kind of severance there will be – a Brexit with a deal or a Brexit with no deal- keeps investments on the sidelines. Weakness in capital goods output is the poster-child for that problem.

There is future uncertainty about what current trends may mean since Brexit uncertainty has also spurred some activity as some firms have stockpiled goods, owing to uncertainty of access to them in the post-Brexit environment. Ironically, Brexit is retarding investment and then selectively boosting or hurting other underlying industries depending on how they see the future and what actions they have decided to take to protect their own interests.

With Brexit undecided, the U.K. economy is simply too difficult to analyze. In the IMF outlook released yesterday, there was considerable space devoted to Brexit and its uncertainty and what the aftermath of the U.K. leaving the EU might do to growth under several different assumptions (here, download pdf file and see page 28, "Scenario Box 1.1. A No-Deal Brexit"). Needless to say, the IMF remains concerned.