British factory output fell unexpectedly in June, an unwelcome reminder of the poor state of the country's economy as it faces new challenges from global financial turmoil and widespread riots in London and other cities. The weak official data followed reports overnight from trade associations of low consumer confidence in the retail and property markets last month.
Uppermost in these consumers minds now will be television images of burnt-out, looted shops in the capital and other big British cities, after a third night of rioting spiralled out of control on Monday. The Office for National Statistics said British industrial output contracted at its fastest pace since May 2009 in the three months to June. A 0.4 percent drop in factory output in June, and a failure of North Sea oil and gas output to get back on stream after maintenance in May, meant the broader industrial output measure fell even more than the ONS had assumed when it made initial calculations of second-quarter GDP last month.
"The downside risks for the UK economy have increased and the risks that the UK falls back into recession have grown. The recent market turmoil might already be enough to the balance," said Vicky Redwood, of Capital Economics. Redwood - one of the more bearish analysts of the British economy - put the chances of a return to recession at around one in three, adding that the eurozone debt crisis and US credit rating cut were likely to cause more lasting damage than the UK riots.
All these factors will provide a grim backdrop for the Bank of England when it unveils new economic forecasts on Wednesday, which are expected to show cuts to growth projections for this year and next, and possibly even hint at more monetary stimulus. "The worry is that plunging equity markets will hurt business confidence and lead to firms cutting orders thus prompting further falls in output. As a result, the prospect of further action from the BoE continues to grow," said James Knightley, an economist at Dutch bank ING.
A Reuters poll of 50 economists forecast the UK would grow by just 1.2 percent this year, lower than the official forecast of 1.7 percent. If true, that could undermine the government's debt-cutting targets. The poll also put the chances of the BoE injecting more stimulus into the economy at 30 percent, up from 25 in a poll last month.
Industrial output was 1.6 percent lower than in the first quarter, compared to the initial 1.4 percent fall the ONS had pencilled in. Economists estimated this would shave 0.03 percentage points off Britain's meagre 0.2 percent Q2 growth rate. June's fall in factory output is bad news for those - including the British government and the BoE - who hoped manufacturing would rapidly get back on track after several months of disruption to supply chains from Japan's tsunami and Britain's royal wedding.
The weak industrial production also pushed Britain's overall trade deficit for goods and services in June to its highest since December at 4.496 billion pounds. Net oil imports were the highest in almost three years. The British Retail Consortium reported that retail sales rose 2.5 percent year-on-year by value in July, which given high inflation implies falling sales volumes. And the Royal Institution of Chartered Surveyors reported a further decline in house prices, albeit at a slightly slower pace than before.
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