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UK Oil & Gas Industry Fears Steep Decline In Industrial Output

A sharp increase in oil and gas production and a mild rebound in manufacturing boosted UK industrial output in August, assuaging fears of a steep slowdown in the third quarter of this year.

The positive figures follow a string of weak data, which raised fears that British manufacturers and exporters in particular were struggling with a strong pound and a slowdown in emerging markets.

The British economy expanded strongly in the first two quarters of this year, but the growth in output is set to slow in the third quarter. The Bank of England, which is considering the first increase in interest rates since the financial crisis, has recently turned more cautious, prompting analysts to push back their forecasts for a rise until the spring.

While economists welcomed the small signs of industrial revival in August, they cautioned that the overall trend remained weak, adding that the sector was likely to post only a marginal expansion in the three months to September.

“August’s UK industrial production figures are surprisingly good, although they aren’t enough to have stopped the overall economic recovery from slowing in the third quarter,” said Vicky Redwood, chief UK economist at Capital Economics. “Accordingly, production in the third quarter as a whole should just about manage to eke out a rise.”

Industrial production increased 1 per cent between July and August, and 1.9 per cent compared with a year ago. The upswing, which comfortably beat expectations, was largely driven by increases in crude oil production, with output in mining and quarrying as a whole rising nearly 18 per cent year on year.

The manufacturing sector expanded on a monthly basis by 0.5 per cent in August, following a 0.7 per cent fall in July. However, output was still 0.8 per cent lower than a year ago and 6.5 per cent below the pre-crisis peak.

Transport equipment rose sharply, powered by the production of motor vehicles, which increased 13.6 per cent on a yearly basis.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “August’s rebound in manufacturing output does not mask the underlying sluggishness of the sector. Weakened manufacturing activity is worrying for hopes that UK growth can become more balanced and less dependent on the services sector and consumer spending”.

Industry groups welcomed the slight improvements but said the government had to do more to support exporters.

Lee Hopley, chief economist at EEF, the manufacturers organisation, said: “Today’s data offer a small slice of positive news for the sector, with slight pick-ups in sectors related to oil and gas. With manufacturing clearly facing some mounting challenges this year, upcoming decisions in the spending review around support for exporters and innovators will be critical.”

David Kern, chief economist of the British Chambers of Commerce, said: “The manufacturing sector is facing many headwinds driven by difficult global circumstances. Additional efforts are needed on the part of the government to strengthen the manufacturing sector, particularly in key areas such as exports, access to finance and skills.”

*Separately on Wednesday, the National Institute of Economic and Social Research estimated that gross domestic product grew 0.5 per cent in the three months ending in September, slightly below the 0.7% recorded in the second quarter.

NIESR said: “This slight softening in the third quarter is expected to be temporary. It is consistent with our latest forecast for the year as a whole. Economic growth remains reasonable and, although we do not expect the Bank of England’s Monetary Policy Committee to vote to raise rates at its October meeting, we continue to expect the first rise in Bank Rate in the first half of 2016.”

Published on:
October 9, 2015
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