Forex News:U.K. manufacturing output and industrial production slumped in May amid broad-based falls across the sector, adding to pressure on the Bank of England to cut interest rates again this year.
Data from the Office for National Statistics Monday showed that industrial production declined 0.8% on the month and 1.6% on the year in May, the sharpest yearly fall since December 2005. Manufacturing output also weakened significantly, falling 0.5% on the month and 0.8% on the year.
A Dow Jones Newswires survey of economists had forecast manufacturing output would be flat on the month in May and would fall 0.1% in annual terms. Economists forecast that industrial production would decline 0.1% on the month and 0.8% on the year.
"The sharp fall in U.K. manufacturing output adds to recent evidence that the U.K. economy is perilously close to recession," said Paul Dales, an economist at Capital Economics.
"With the business surveys already pointing to an even sharper downturn in manufacturing activity, the industrial sector is likely to continue to add to, rather than offset, the weakness in other areas of the economy," he said.
The weaker-than-expected data will add to the dilemma facing the Bank of England as it weighs up the impact on inflation from an economic slowdown and rising food and energy prices.
The BOE's Monetary Policy Committee has reduced its main interest rate three times since December, but kept rates on hold at its last two meetings after inflation accelerated.
The bank's rate setters meet this week and are widely expected to leave rates unchanged at 5.0%.
"Sharply contracting industrial production...heightens concern that the economic downturn is deepening," said Howard Archer, an economist at Global Insight.
"Nevertheless, an interest rate cut this Thursday remains a remote possibility, given the Bank of England's concern over current elevated inflation levels and risks," he said.
The ONS said manufacturing output weakened across the board in May, with 10 out of the 13 subsectors declining.
The industrial production measure was weakened by a 5.2% decline on the year in May in gas, electricity, and water output, the largest fall since October 2001, the ONS said.
April data for manufacturing and industrial production were revised down, the ONS said. Manufacturing output was flat on the month and on the year, down from an originally reported 0.1% rise in monthly and annual terms. Industrial production gained 0.1% on the month and on the year in April, down from an originally reported 0.2% rise in monthly and annual terms.
Sterling fell sharply on the news. The pound dropped 35 ticks against the dollar to the day's low of $1.9685 while the euro rose 14 ticks against the pound to a day's high of GBP0.7940.
The weaker-than-expected manufacturing data follows a raft of weak surveys in recent weeks.
The purchasing managers index for the U.K.'s manufacturing sector Tuesday plummeted to a six-year low in June, sinking to 45.8 from May's 49.5. The slowdown showed the sector is now moving heavily into contraction territory below a reading of 50.
The most recent survey by the Confederation of British Industry, meanwhile, showed that manufacturing orders rebounded to +1 in June from May's -10. But price pressures remained elevated and are likely to rise further in the months to come, the survey said.
On a three-month basis, which helps iron out volatility in the monthly data, manufacturing output fell 0.2% from the previous three-month period. Industrial production in the three months to the end of May fell 0.5% from the previous period.
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