UK business output slows in April

A crop of UK data releases on Friday indicate business output continued to slow at the beginning of the second quarter.

Survey data, such as purchasing manager indexes, has in recent months raised hopes that the weak growth seen in the first quarter was temporary, and that a pick up is due this quarter.

Manufacturing output and industrial production data for April, however, have failed to confirm the acceleration in growth suggested by the surveys.

The data breakdown

While industrial production climbed 0.2% month-on-month in April from a 0.5% decline in March, it failed to meet market expectations of a 0.8% rise.

On an annualised basis, however, industrial production was down 0.8% in April, worse than the forecast 0.2% drop. In March, production had grown at an annual pace of 1.4%.

Building and construction output drops: FTSE-listed builders are the biggest fallers on the UK stock index - Source: Pixabay

Manufacturing output, meanwhile, did pick up – but not at the pace forecast by the market. April saw month-on-month output growth of 0.2% after a 0.6% drop in March, but failed to match expectations of 0.9%.

This equated to a flat reading for the year in April – down from a more robust 2.2% in March and missing expectations of 0.7% annual growth.

Completing a trio of worse than expected output data, construction fell 1.6% month-on-month in April after climbing 0.7% in March, as new work, repairs and maintenance all dropped.

"The data suggest that the production and construction sectors are on course to provide a negligible contribution to GDP growth in Q2 once again," says Ruth Gregory, UK economist at Capital Economics.

Comparing the surveys

Surveys of UK purchasing managers have shown during April and May that expectations are high for a second-quarter pick up in business activity.

In April, the manufacturing PMI hit a three-year high, and although it slipped slightly to 56.7 in May, the higher the index climbs above the 50 level, the stronger the expected rate of growth in the sector.

Indeed, Friday's data releases from the Office for National Statistics may represent a lag between the renewed optimism from purchasing managers, and real activity picking up after the disappointing first-quarter.

"Survey evidence has remained very buoyant and is still pointing to a big acceleration in the quarterly growth rate of manufacturing output – from Q1’s 0.3% rate to about 1% in Q2," adds Gregory.

Trade balance

The good news out of Friday's clutch of data was that the trade gap between exports and imports narrowed. In April, Britain's trade deficit narrowed to £2.05bn from £3.9bn in March.

A weaker pound has made imports more expensive and demand for foreign goods fell in April, while export volumes rose by 3.7%.

"The boost from the lower pound seems to be gradually coming through in the trade volumes figures," says Gregory.

The markets

The pound has fallen dramatically – by more than 2% – but much of Friday's market activity has been dictated by the result of the UK general election and the prospect of weak coalition.

While the pound recovered some ground later, it remained 1.7% lower at $1.2733 against the dollar.

Pounded: Sterling drops sharply, but it is more to do with the UK election results than the data - Source: Max Pixel

Bond prices have risen as investors seek havens from market volatility. As Gilt prices rose, yields fell, with the Benchmark 10-year Gilt yield eased 5 basis points 1.01%.

Stock markets, however, have reacted to the data. While the FTSE 100 is higher, thanks to the boost given to international stocks, construction and building sectors are lower after the weak construction output data.

Housebuilders Barratt Developments, Persimmon and Taylor Wimpey all lost more than 2%.

"The construction industry is forever plagued by leadership and policy changes as most infrastructure projects cross over elections, meaning there is never clear water to steer towards," says Brendan Sharkey, at MHA MacIntyre Hudson.