Surprise increase in industrial output raises hopes of recovery

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TRANSPORT equipment, food and chemicals manufacturers helped industrial production recover faster than expected in December, raising hopes Britain will avoid sliding back into recession.

Industrial production, which makes up about 15 per cent of the economy, grew 0.5 per cent on a month earlier, said the Office for National Statistics. That growth beat forecasts of 0.2 per cent, and reflected factories increasing output after a sluggish start to the final quarter of 2011.

Pure manufacturing output, which excludes utilities, oil and gas, rose one per cent month-on-month, versus hopes of a 0.2 per cent gain.

The surge in production came as separate figures showed Britain’s goods trade deficit narrowed in December to £7.1bn. That was the smallest gap since February 2010 and down significantly on an £8.9bn trade gap in November.

Including the dominant services sector, the overall trade gap shrunk to just £1.1bn, the lowest since April 2003.

However, the output figures showed a bigger 1.4 per cent drop in overall industrial production for the fourth quarter as a whole. The ONS said this would mean a slight downward revision to the fourth quarter GDP figure, which showed output declined 0.2 per cent between October and December.

Two consecutive quarters of declining output would show Britain’s economy has slumped back into recession.

The Bank of England yesterday confirmed plans to pump another £50bn into the economy through asset purchases or quantitative easing (QE) to boost the economy.

IHS Global Insight economist Howard Archer said: “December’s appreciable bounce in manufacturing output is very good news; and together with the improved January survey evidence, boosts hopes that the sector is past the worst and is on course to return to growth in the first quarter thereby helping the overall economy to also return to growth.

“However, it needs to be borne in mind that December’s rise in manufacturing output followed six successive months of falling production and the sector still faces a very challenging environment. So question marks remain as to whether the sector can sustain its improved performance around the turn of the year.”

Yesterday’s industrial output figures follow “tentative” signs of optimism from the CBI’s fourth quarter manufacturing survey, plus surprise growth in the Markit/CIPS manufacturing purchasing managers’ index for January.

George Kilburn, chief executive of the Company of Cutlers in Hallamshire, said: “Almost everyone I speak to says that the outlook is positive but it’s still very bumpy.

“It looks quite fragile but there are lots of good businesses in this part of the world which are growing and doing well. Almost all (businesses reporting growth) manufacture bespoke or high-quality products for a particular market. The difficulty is we get doom and gloom one minute, and then it looks to be picking up. We still need to put the effort in; the Government needs to keep focused on this.”

For 2011 as a whole, manufacturing output rose by 2.1 per cent on 2010, with the manufacture of food, drink and tobacco leading growth. Manufacture of alcoholic drinks surged 33.6 per cent in 2011, which the ONS said was down to companies exporting more alcohol.

December’s figures showed transport equipment and chemicals were the biggest risers with three per cent month-on-month growth, while food, drink and tobacco makers gained 1.3 per cent.

A spokesman for Northern Foods parent 2 Sisters Group, the ready meals manufacturer owned by food tycoon Ranjit Boparan, said it saw strong growth in December, with sales up six per cent year-on-year. “A lot of it was promotionally driven,” he said. “We did a lot of promotions at Christmas. In biscuits we were doing more promotions to get the sales in.”

Yorkshire Bank economist Tom Vosa said the growth in manufacturing raises hopes for the first quarter of 2012.

“There is every reason to expect that the rise seen in December will continue through to 2012 and that the annual growth rate of manufacturing output will get close to three per cent by the end of the first quarter,” he said. “So although the fourth quarter proved a little disappointing, the first quarter looks to be in much better shape than feared.”

However, Nida Ali, economic adviser to the Ernst & Young ITEM Club, said the figures were a “mixed bag”. “Growth prospects in the UK are still dominated by downside risks,” she said.

john.collingridge@ypn.co.uk