June upturn fails to change picture of struggling UK manufacturing sector

Manufacturing, hit by the strongest exchange rate since 2007, weak overseas demand and subdued business investment at home, is acting as a drag on the UK economy. The weakness of the sector presents policymakers with a difficult decision as to whether a surging service sector justifies hiking interest rates, or whether growth needs to be more balanced before the economy can safely withstand a tightening of monetary policy.

The output of the manufacturing sector fell 0.3% in the second quarter despite production rising 0.2% in June, according to the Office for National Statistics. However, the data are volatile (May had seen a 0.6% decline), so we shouldn't read too much into June's rise as to whether this represents the start a revival. In contrast, weak survey data in July suggest that the sector continued to struggle as it entered the third quarter. Having accurately anticipated the second quarter downturn, the Markit/CIPS PMI has since pulled up from June's 26-month low, but the July survey still signalled one of the worst manufacturing performances for two years. The subdued survey data suggest that the goods-producing sector will act as a drag on the economy again in the third quarter.

The wider measure of industrial production fell 0.4% in June after rising 0.3% in May, but increased 0.7% in the second quarter on the back of what looks likely to have been a temporary upturn in oil and gas production.

In a reminder of how disappointing the 'recoveries' have been in the industrial sectors, total industrial production and manufacturing output remain some 9.2% and 4.8% respectively below the economy's pre-recession peak seen at the start of 2008. The much-vaunted UK manufacturing revival remains a distant policymakers' dream rather than a reality and the UK economy remains clearly reliant on the service sector as its primary source of growth.

Disappointing recoveries

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