U.K. Industrial Output on Course for Positive Second Quarter

(Bloomberg) -- U.K. industrial producers are on course to post their first positive quarter in almost a year after they cut output by less than economists forecast in May.

Output at factories, utilities and mines fell 0.5 percent following an upwardly revised 2.1 percent surge in April, the Office for National Statistics said on Thursday. Economists in a Bloomberg survey had predicted a 1 percent drop. Manufacturing contracted by 0.5 percent, also less than expected.

Industrial production is almost certain to contribute to economic growth in the second quarter for the first time since the summer of last year. Output will expand if June sees a decline of less than 6 percent, a drop not seen since 1979. But the British economy is only starting to feel the impact of last month's shock vote to leave the European Union, which is casting doubt on prospects for the rest of the year.

Some surveys suggest uncertainty was hampering the economy even before the referendum and a report published Thursday showed business confidence falling to a 4 1/2-low in the aftermath of the vote. Bank of England Governor Mark Carney has warned of a “material slowing” and signaled that interest rates could be cut within months.

Pharmaceuticals

Seven of 13 manufacturing sectors saw output fall on the month, with the largest contribution coming from pharmaceuticals, which declined 6.5 percent following a surge in April. There were also falls in textiles and leather products and machinery and equipment.

Energy production fell 2.9 percent as warm weather hit demand. Oil and gas extraction declined 0.2 percent.

Industrial production rose 1.4 percent from a year earlier and was up 1.9 percent in the latest three months compared with the equivalent period through February.

Output may rise as much as 2 percent in the second quarter, more than reversing the 0.2 percent decline seen between January and March, according to Alan Clarke, an economist at Scotiabank in London.

“This adds to the list of robust figures that we have seen for Q2 which suggest that, contrary to fears that GDP growth might stall in Q2 ahead of the referendum, we may actually see an improvement” on the first quarter, when gross domestic product grew by 0.4 percent, he said. “At the moment, I'm minded to go for 0.5 percent to 0.6 percent quarter on quarter.”

One bright spot for manufacturers is the sharp drop in sterling since the referendum, which may help exporters, although it also pushes up the cost of imported materials. The pound has tumbled 13 percent against the dollar since June 23 to a three-decade low. It was at $1.2992 at 9:53 a.m. London time, up 0.5 percent on the day.

--With assistance from Mark Evans To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net. To contact the editors responsible for this story: Paul Gordon at pgordon6@bloomberg.net, Andrew Atkinson