The Office for National Statistics showed that total industrial production decreased by 1.1% between July 2013 and August 2013. There were downward contributions from all the main sectors, with manufacturing decreasing by 1.2% after two consecutive increases. The main components contributing to the decrease in manufacturing were weakness in the manufacturing of pharmaceutical products and preparations; computer, electronic and optical products; and the manufacture of food products, beverages and tobacco. Transport equipment was the only bright spot, rising 12.5%.
Azad Zangana, european economist at Schroders, said: "The weaker than expected manufacturing data has so far driven sterling about a third of a percentage point lower against the US dollar. It should also begin to persuade markets that the UK is in no condition to withstand rising interest rates. Markets have been pricing in a rise in interest rates before the end of 2014, despite the Bank of England’s forward guidance suggesting no increases in interest rates before 2016."
The fall in industrial production at 1.1% was significant lower than consensus expectations of a rise of 0.4%. Recent services data was also weaker than expected and Zangana says this will lead many to question the UK’s nascent recovery: "Leading indicators such as the purchasing managers indices were suggesting growth for the third quarter overall of 1.5-1.6% compared to the second quarter, but the official ONS data has been far weaker," he adds.
Jeremy Cook, chief economist at currency brokers World First, also believes that the data shows the UK’s economic revival cannot be guaranteed: "The divergence between the recent, multiyear highs on PMIs and the official data is worrying and a little difficult to explain. Could businesses be overly exuberant without cause?"
The ONS also release data on the profitability of private non-financial companies, which – at 11.4% in the second quarter of 2013 – was at about the same level experienced over the past 18 months but lower than the levels experienced in 2011. Manufacturing companies’ net rate of return was estimated at 7.2%, the lowest level seen since the first quarter of 2003. In contrast, service companies saw an expansion in profitability.
Leigh Himsworth, manager of the City Financial UK Select Opportunities fund, said: "I remain cautious about the mechanics of recovery and moving the dials back to any sort of normality as this may cause extraordinary levels of stress in the markets. My quandary is: what is the norm? Is it what we believe used to exist prior to 2008 or is it the years since? Perhaps we are in the new norm.
The recent market reaction, or lack of, makes me think that if no-one else is worried about this debt, why should we? Ultimately, it must be down to confidence. Investors presently believe that the authorities remain in control and will simply print money to meet governmental or bond financing requirements. It is a change of confidence that we have to look out for. For me, this is where we take our lead from the US 10 year bond yield; this will dictate what happens."
