Continued healthy growth, in line with surveys

Manufacturing output rose 0.3% MoM in July: in line with market expectations and continuing the healthy growth in the sector experienced since late 2009.

Output of consumer durable goods rose particularly strongly over the month. More broadly though, growth in consumer durables output has fallen back markedly from peaks late last year. That is partly related to the boost from the government's car scrappage scheme dropping away. After a sharp 9% drop in July, motor vehicle output is now down around 16% from its recent peak in March. Nevertheless, it remains around 30% above its trough in early 2009. In contrast, growth in capital goods output has been particularly strong since late last year, potentially consistent with the robust 6% rise in business investment in 2010H1.

Continued healthy gains in this official data for manufacturing output are in line with the range of survey evidence for the sector. Although having fallen back somewhat from 16yr highs in the Spring, the manufacturing PMI remains at robust levels. The CBI and BoE's agents surveys have also continued to strengthen in recent months, with export orders very healthy (though export orders have fallen back to around average levels in the PMI of late).

Even after the robust increases over the last few months, manufacturing output has only recovered around 4pps of the circa 15% peak to trough fall from early 2008 to mid-2009. A turn in the inventory cycle has aided that recovery, though inventory levels are still around 9% below their peaks in early 2008. With continued support from the weakness of sterling, we expect continued gains in the manufacturing sector over the next few months. However, manufacturing is only around 13% of the economy. Evidence suggests notably weaker performance in the service sector (eg the services PMI), which accounts for around 75% of GDP: so notwithstanding the robust growth in the manufacturing sector, we expect that to be the main driver of below-trend GDP growth in the second half of this year.

source:

Research report