Recovery hopes hit by shrinking factory output

The worst month for Britain’s manufacturers since January and a widening trade deficit gave a reality check to recovery hopes today following a raft of upbeat news.

Buoyant retail spending, the biggest surge in demand from would-be homeowners since 2009, and rising confidence among financial executives have fuelled the feelgood factor surrounding the economy in recent days. But manufacturing output shrank by a bigger than expected 0.8% in May, confounding more positive survey data and City expectations of a rise. Overall industrial production remained stagnant in May, the Office for National Statistis added.

Moody’s Analytics UK economist Melanie Bowler said it could take until “close to the end of the decade” for manufacturers to make a full recovery as output lags 13% below its pre-recession peak. She said: “We do not anticipate a strong, sustained recovery in industry for some time, given that domestic demand remains bound by fiscal austerity and that still-severe economic difficulties facing key euroland trade partners suggest demand for British exports will remain contained.”

The UK’s goods trade gap with the rest of the world meanwhile widened to £8.5 billion in May, leaving it unlikely to make the same contribution to growth seen in the first quarter. Excluding oil and one-off items, exports have grown 1.3% over the past quarter, compared with a 1.4% rise in imports.

Bright spots included a narrowing of the trade deficit with China as exports grew 17% above the UK average, but experts saw little sign of a significant trade boost. Berenberg bank economist Rob Wood said: “An export-led recovery this is not. All the pressure is on the consumer and the services sector to maintain growth.”

There was better news from advertisers, who grew spending 2.4% in the first quarter, according to the Advertising Association and research firm Warc. Internet advertising was the main driver, surging 11%. “These figures don’t just reflect growing confidence, they represent an important investment in the recovery,” said Tim Lefroy, chief executive of the AA.