Drop in manufacturing and construction ahead of expected slowdown

Output in Britain's manufacturing and construction industries dropped back in January and the trade gap was flat as the UK braces for an expected slowdown in economic growth.

Figures from the Office for National Statistics (ONS) showed construction output fell 0.4% in January in line with expectations, down from 1.8% growth in December, as repair and maintenance dropped 1.3% over the period.

Industrial production output came in lower than expectations, but still fell 0.4% in January compared to 0.9% growth the month before.

The drop was driven by manufacturing, which fell 0.9% over the period as the "highly erratic" pharmaceuticals industry slipped by 13.5%.

However, Britain's deficit in goods and services, the gap between exports and imports, was £2 billion in January, level with the month before.

The ONS said exports increased slightly more than imports over the period at £400 million and £300 million respectively.

The UK economy defied economic forecasts by recording robust growth in 2016 despite fears of a Brexit-induced slowdown.

However, economists expect growth to slow in 2017 as inflation triggered by sterling's slump since the Brexit vote begins to squeeze household spending.

Despite month-on-month falls in manufacturing and construction output, the three-month period to January revealed a brighter picture.

Total production output grew by 1.9% over the period after manufacturing notched up its strongest expansion since May 2010 at 2.1%.

Construction output also expanded by 1.8% for the three months to January, with all new work growing by 2.1%.

Meanwhile, Britain's trade gap shrank by £4.7 billion to £6.4 billion over the three-month period thanks to rising exports of oil, machinery, transport equipment and non-monetary gold.

Kate Davies, ONS senior statistician, said: "Taking the last three months together, construction and manufacturing both grew strongly, with considerable narrowing in Britain's trade deficit.

"However, both manufacturing and construction were broadly flat on the month with the trade balance little changed.

"Construction orders fell back a little overall in the second half of 2016, albeit after strong growth in the first half of the year."

On trade, Nina Skero, managing economist at the Centre for Economics and Business Research (Cebr), warned against focusing on the monthly figures.

"Monthly trade figures are volatile and it is therefore important to consider the longer term trend which points to a substantial but narrowing deficit.

"In the year ahead, Cebr expects trade to make a positive contribution to GDP growth.

"We have argued many times in the past that supporting economic growth by boosting trade performance will be impossible with such a strong and overvalued pound.

"While a sudden depreciation of the pound following the Brexit vote led to other concerns (e.g. higher input costs), it also created the conditions necessary to rebalance economic growth away from consumer spending, which has been a key driver in recent years.

"Lessening the dependence on consumers is particularly important given rising inflation and stagnant wage growth both of which promise to make households more cautious with their spending."

Alan Clarke, head of European fixed income strategy at Scotiabank, said it would be wrong to be misled by "all the negative signs" within Friday's slew of economic data.

"In summary, these data for January, the first month of first quarter, make me confident that first-quarter GDP growth can easily record 0.5% quarter on quarter still and possibly even 0.6% quarter on quarter."