UK manufacturers post modest recovery from Brexit shock

British Prime Minister Theresa May (center) meet technicians during a visit to the Warwick Manufacturing Group facility at the University of Warwick on Sept 1, 2016.
British Prime Minister Theresa May (center) meet technicians during a visit to the Warwick Manufacturing Group facility at the University of Warwick on Sept 1, 2016. PHOTO: AFP

LONDON (BLOOMBERG) - UK manufacturers staged a modest rebound from the initial shock of the Brexit vote, as a weaker pound boosted overseas demand for cars.

Output rose 0.2 per cent in August, less than the 0.4 per cent predicted in a Bloomberg survey, Office for National Statistics data published Friday show. It followed a 0.9 per cent drop in July in the aftermath of the shock decision to leave the European Union. Total industrial production fell 0.4 per cent, driven by a drop in oil and gas extraction.

Separate trade figures showed the deficit widening in August as exports virtually stagnated and imports surged.

With surveys pointing to growth across the UK economy in the third quarter, Britain appears on course to avoid the Brexit-induced recession predicted by some in the aftermath of the June 23 referendum.

A slowdown is nevertheless under way, with business investment expected to be hard hit as Britain faces an uncertain future outside the EU - the destination for more than 40 per cent of UK exports. Formal withdrawal negotiations are due to begin by April and fears of a so-called hard Brexit sent the pound to its lowest level against the dollar in 31 years this week.

Only four of 13 manufacturing sectors saw output rise in August, with transport equipment providing the biggest upward contribution. There was "limited evidence" that the sharp fall in the pound boosted demand for cars during the month, ONS statistician Kate Davies said.

Shutdowns of some oil and gas field saw extraction fall 4.4 per cent, leaving total industrial lower on the month. Industrial output will shrink in the third quarter unless September sees growth of at least 1.2 per cent.

The sharp fall in the pound since the Brexit referendum failed to provide a widespread boost to exports, which rose just 0.2 per cent in August. Imports, by contrast, jumped 7.5 per cent, driven by foreign shipments of electrical machinery, cars and aircraft. As a result, the trade deficit widened to to 12.1 billion pounds (S$20.88 billion).

In the latest three months, the shortfall in goods and services widened to 12.6 billion pounds from 9 billion pounds, suggesting trade may again act as a drag on growth in the third quarter. The shortfall in August alone widened to 4.7 billion pounds.

Business has expressed growing alarm over the prospect of a hard Brexit amid signs that Prime Minister Theresa May sees controlling immigration from the EU as more important than retaining access to the single market.

Brexit backers say the EU won't to put up trade barriers because it sells far more to the UK than vice versa. The gap widened to a record 8.4 billion pounds in August.