Research Team at RBS, notes that the UK manufacturing production fell sharply in July to 0.9% m/m which is the largest contraction for a year and some way below City forecasts (Bloomberg consensus & RBS: 0.3%, City forecast range: 1.2% to +0.4%).

Key Quotes

“The wider industrial production (IP) gauge, which includes energy extraction and utilities output, rose 0.1% m/m in July, fuelled by a 5.6% surge in oil & gas output.

In essence, the upside surprise in the IP data stemmed from the hugely volatile ‘oil & gas extraction’ subcomponent. The more informative manufacturing data showed weakness across a wide range of sectors in July.

Even if the reported fall in manufacturing output in July exaggerates the underlying extent of the deterioration (it almost certainly does), the balance of risks has jolted back towards a weaker Q3 GDP print (our forecast for Q3 GDP remains +0.2% q/q). The official ONS industry data in July are more significant than the PMI survey in August (the PMI data are relevant in terms of the underlying trend – which in any case remains sluggish – not individual monthly outturns).

Assuming some normalisation in the August and September data, British industry remains on course for IP to contract in Q3: by around 0.2% q/q. British industry is heading back into recession – the construction sector is already there on the ONS data and we are likely to see ongoing weakness there in Q3 (construction data for July will be published on Friday). The predominant services sector is likely to provide some offset, but underlying trends here suggest Q3 growth of around 0.4%0.5% q/q – which would see overall GDP growth fall sharply to +0.2% q/q in Q3 vs +0.6% q/q in Q2.

Our central case remains for the UK economy to experience a material slowdown over the next few quarters, with recent developments in several important global indicators suggest more obvious downside risks are building.”

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