11 Jan 2017

UK economy still chugging along, exports disappoint

Philip Shaw

Chief Economist

Official indicators of UK activity from November were released earlier today. The ONS is attempting to group various releases of a particular genre in what it terms ‘theme days’ to provide coherent ‘windows’ on the economy. Specifically in this case it gives us further information to feed our Q4 GDP ‘nowcast’.

  • First off, industrial production outperformed market forecasts, posting a 2.1% gain in output on the month, following a 1.1% decline in October (consensus +1.0%, Investec +1.4%). A major driver was the Buzzard oilfield coming back on stream following maintenance based shutdowns. Another was a 1.3% rebound in manufacturing output after October’s 1.0% fall. Consensus was +0.5%, while we had +0.8%. The recovery was broad based, with 10 of the 13 subsectors expanding, although pharmaceuticals led the way with a gain of 11.5%.

  • Second, construction output edged down by 0.2% on the month. In contrast with the picture painted by the more buoyant sector PMI, official data show construction struggling. November marks its sixth contraction in nine months, although the level of output in the sector is estimated to be 1.5% higher than a year ago.

  • Third, the balance of trade in goods in November recorded a higher than expected deficit of £12.2bn (consensus £11.2bn, Investec £11.4bn). Export values reached a monthly record of £27.0bn, though imports also hit an all-time high (of £39.2bn). Indeed the trade shortfall on all measures (e.g. excluding oil and erratic factors, including services) appears to be widening. Looking at volumes reveals a similar picture. Core export volumes (i.e. ex-oil and erratics) fell by 1.2% in the year to the three months to November. At the same time, core imports rose by 5.3%. Interestingly and despite the weakness of sterling, core export prices are rising more quickly (12.0%) than those for imports (7.2%). It seems as though UK manufacturers are using the depreciation in the pound to boost their margins, rather than to press for greater market share.

  • Overall November’s rebound in production means that the manufacturing sector probably returned to expansion in Q4, following a 0.8% decline in Q3, although the construction sector more than likely contracted for the second successive quarter. Of course we cannot get a definitive steer on GDP without more information on services, which account for close to 80% of GDP. Nonetheless the data tend to validate our GDP ‘nowcast’ of +0.4% on the quarter, with the risks tilted to the upside. This follows a +0.6% quarterly rise in GDP in Q3.

  • In summary, today’s release does not change our overall assessment of UK economic prospects. So far the pace of activity has held up well since June’s EU referendum. But as yet there seems to be little or no response from the volume of exports to sterling’s 15% trade weighted deprecation over the past 12 months. Unless this changes, the pace of GDP growth seems likely to soften over 2017 as higher inflation begins to bite into real incomes and slows the pace of consumer spending. Our GDP forecast for this year remains +1.4% from +2.0% in 2016.