A stronger sterling against the euro and weaker exports continue to weigh on the overall performance in factories across the UK in the second quarter.
UK industrial production, including the extraction of oil and gas from the North Sea, is expected to have declined 0.4% between April and May, after rising the same amount a month before. The latest official data showed industrial output picked up in April mainly due to an increase in global oil demand, which translated into stronger oil and gas extraction.
While the overall industry index was driven in April by more crude oil extracted, the manufacturing sub-sector experienced a marked setback, when output at UK plants decreased unexpectedly by 0.4% due to a sudden plunge in pharmaceutical products. In May, economists expect factories' production to have rebounded only slightly by 0.1%.
The Office for National Statistics is releasing the May figures on Tuesday.
The latest Markit/CIPS PMI indicator showed UK manufacturers continued to struggle in the second quarter as business activity decelerated unexpectedly in June, while the whole second quarter was the weakest since Q1 2013.
This dents the hopes of the economy rebounding more broadly from a sudden slowdown in the first quarter. Feedback to the Markit survey also revealed that a stronger pound against the euro and a continuing crisis in the euro zone weighed on production. This was partially offset by stronger domestic demand.
In its June summary of business conditions, the Bank of England (BoE) said manufacturing output growth had edged higher for the domestic market, while growth in goods exports had remained subdued overall. "For some, euro-area economic conditions and sterling’s rise against the euro had led to a decline in European sales volumes, although the effect had been more pronounced for sales values," the BoE said.
Sterling has surged against the euro some 9.52% since the start of this year until today while the sterling trade weighted index, an average of the exchange rates of sterling with the currencies of its most important trading partners, rose 5.6%.
Manufacturing is also the sector where wages have been growing at the slowest pace. While weekly earnings in the services sector rose some 2.9% in the quarter to April, manufacturers saw their pay ticking up only 1% during the same period, and 0.7% in the previous quarter.
According to the latest CBI [Confederation of British Industries] Growth Indicator, "UK manufacturing growth gained a bit of traction, but overall remained moderate." The CBI also said British exporters "face real challenges, especially from the impact of a stronger pound against the Euro and still weak global export markets."
On overall economic performance, CBI said "the rate of economic growth slowed in the three months to June, but activity remained solid across the quarter as a whole" while expectations remain high with businesses expecting stronger third quarter.
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