By William Schomberg and David Milliken
LONDON (Reuters) - British manufacturing contracted in May at its fastest pace since January, tempering signs that the economy is picking up speed.
Overall industrial output was also weaker than expected as it came in unchanged from April, and the country's trade deficit worsened in May to hit its highest level in six months.
"It's just a reminder that while the UK economic figures are looking better, the economy isn't out of the woods yet," said Philip Shaw, an economist at Investec in London, referring to the production figures.
Sterling fell to a near four-month low against the euro and gilts rallied after the data, which represented a break from a string of economic indicators that have beaten forecasts in recent weeks.
The Bank of England announced no new bond-buying stimulus last week after the first policy meeting chaired by new governor Mark Carney, but the central bank surprised markets by warning against premature expectations of an interest rate increase.
Manufacturing shrank by 0.8 percent, much weaker than forecasts for a 0.3 percent rise in a Reuters poll and was down 2.9 percent compared with May 2012, when there was one less public holiday than in May 2013.
Output in the industrial sector - which makes up about 15 percent of Britain's economy - was flat compared with April, falling short of forecasts for a 0.2 percent rise, the Office for National Statistics said.
The overall industrial output figure was supported by a 4.9 percent rise in oil and gas output, the biggest jump in six months after some maintenance projects were completed.
Some economists said they were surprised by the weak manufacturing data, which came a week after a survey of purchasing managers found the sector had its best growth in more than two years in June. That is a month later than the period covered by Tuesday's release.
"Today's figures feel a little out of kilter with other industry data and what our manufacturing clients are telling us," said Mike Rigby, who manages Barclays' banking relationships with manufacturers.
"Our clients suggest they have increased visibility of their forward order book which is having a positive effect on their appetite to invest. To many it feels like we are experiencing a more positive outlook," he added.
Three surveys published earlier on Tuesday showed rising house prices, improved business confidence and steady growth in retail sales.
The ONS said that on an annual basis, industrial output was down 2.3 percent, compared to forecasts for a 1.5 percent drop.
In the three months to May, output in the industrial sector was up 0.3 percent.
The ONS also said Britain's goods trade deficit grew to 8.491 billion pounds ($12.68 billion) from 8.430 billion pounds in April. Economists had forecast a gap of 8.47 billion pounds.
Including Britain's surplus in trade in services, the overall trade deficit widened to 2.435 billion pounds.
The monthly figures tend to be volatile, but over the three months to May, total exports were up 1.9 percent and imports grew 2.3 percent. ($1 = 0.6695 British pounds)
(Additional reporting by Olesya Dmitracova, Christina Fincher and Mark Anderson; Writing by William Schomberg; Editing by Catherine Evans)
Source: http://news.yahoo.com/uk-may-industrial-output-flat-trade-deficit-widens-083351493.html
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