Blow to recovery hopes as factory output falls

The weak output data, together with news of a sharp slowdown in factories’ input costs in May and a survey showing public inflation expectations fell for the first time in more than two years, reinforced the view that interest rates will stay on hold for several months to come.

The Office for National Statistics said industrial output fell 1.7 per cent in April, confounding the median forecast for a rise of 0.1 per cent, and the biggest fall since August 2009.

The narrower measure of manufacturing output – which does not include utilities or oil and gas extraction – dropped 1.5 per cent in April, the steepest fall since January 2009.

Economists have cautioned that the unusual combination of an extra holiday, late Easter and record warm weather in April would make it difficult to forecast data and to assess the state of the economy throughout the second quarter.

This uncertainty was reflected in the broad range of forecasts for the April industrial output figures, which ranged from a rise of 0.7 per cent to a drop of 5 per cent on the month.

Many investors had been positioning for a weak reading and gilt futures trimmed some of their early gains. Sterling initially fell to a session low against the dollar and the euro, but quickly recouped most of those losses.

“It is difficult to interpret the current underlying trend in the sector from these figures, but there is plenty of evidence that growth is continuing to moderate,” said Hetal Mehta, economist at Daiwa Capital Markets.

“We certainly do not expect manufacturing to make as big a contribution to GDP growth in Q2 as in Q1,” she said.

Manufacturing has been a driving force of Britain’s economic recovery, benefiting from a past fall in the pound and robust demand from other countries. But recent surveys have indicated the sector may be running out of steam.

Nonetheless, Prime Minister David Cameron insisted the Government was following the right course of action to rebalance the economy. “You are moving from one sort of economic model to a new sort of economic model, but I believe we are seeing that rebalancing, we are making progress.”