This article is more than 3 years old

This article is more than 3 years old

A drop in manufacturing output, a slowdown for the construction industry and a widening in Britain’s trade deficit have doused expectations that the Bank of England will raise interest rates over the coming months.



The pound dropped sharply against the dollar and euro on Friday after the latest signs that the economic resilience seen after last summer’s Brexit vote has waned.

A trio of weaker-than-expected reports from the Office for National Statistics left traders scrambling to scale back earlier bets that policymakers could raise interest rates by the end of 2017 and perhaps as soon as next month.

“The data releases of the past week will help to dissuade the UK’s monetary policy committee from a near-term rate hike,” said Victoria Clarke, economist at Investec. “Looking ahead, the household cash squeeze is set to remain a continued drag. And with the UK’s more export focused manufacturing sector seemingly losing momentum, we see continued signs of a UK economy that is struggling to gain any serious pace.”

The Bank’s interest rate-setting committee has been divided over when to lift borrowing costs from their record low of 0.25% to keep inflation in check. Much of the debate has centred around whether stronger exports and business investment can offset a slowdown in consumer spending as households grapple with higher living costs.



Pound falls as UK trade deficit swells and industrial output falls unexpectedly - business live Read more

The latest figures showed exports did pick up between April and May but by less than imports. That meant the trade deficit widened more than expected, tempering hopes that the pound’s sharp drop since the Brexit vote would drive a revival in exports because it made UK goods cheaper in overseas markets.

Export volumes rose 2.5% in May while imports rose an even bigger 4.8%. That pushed the deficit on trade in goods to £11.86bn in May from £10.6bn in April.

The deficit including trade-in services, which covers activities such as banking and legal services, widened by £1bn to £3.1bn, reflecting an increase in imports.

“Net trade still is not compensating fully for the damage to households’ spending power wrought by sterling’s depreciation,” said Samuel Tombs, chief UK economist at Pantheon Macroeconomics. “The main problem remains that exporters have hiked their prices, blunting the boost to competitiveness from the weak pound.”

The figures on manufacturing and the wider industrial sector, which includes utilities and mining, were all below economists’ forecasts. Output fell on a monthly basis and also on the less volatile measure of three-months on three-months.

For May alone, a drop in car production helped knock overall manufacturing output down by 0.2% from April, confounding forecasts for a 0.5% rise.



The construction sector also suffered a slowdown in May, with output down 1.2% on the month, defying forecasts for a 0.7% pick-up.

The figures follow news that the economy slowed markedly in the opening months of 2017. Business surveys since then have suggested that activity continues to rise but at a more muted pace as companies grapple with higher costs, weaker consumer spending and skills shortages.

Friday’s figures painted “a rather bleak picture for the UK economy and underline the challenges lying ahead,” said Kay Daniel Neufeld, senior economist at the Centre for Economics and Business Research consultancy.

Based on the latest data, the National Institute of Economic and Social Research estimated the economy grew 0.3% in the second quarter, barely faster than the 0.2% expansion in the first quarter and well below the long-run trend of 0.6%.

But Ruth Gregory at the consultancy Capital Economics said she was expecting growth to accelerate to 0.4% in the second quarter.

She saw some encouraging signs in the trade figures with the three-month growth rate of goods export volumes in May outpacing growth in imports.“Meanwhile, the production and construction sectors only account for around 20% of the economy, and the hard data available for the services sector so far suggests that growth has rebounded strongly after a poor start to the year,” she said.