U.K. IP Growths Segue Ways from Slowing to Plunging

The U.K. economy is suddenly experiencing a world of hurt. With a new government and a budget change that was not well received and then was retracted, the financial markets have been under pressure. The Bank of England has been active trying to stabilize financial markets. However, there's only so much you can do with band aids chewing gum, and a stapler.

Transition to greater weakness The economy has transitioned into a more serious state of decline. The rate of decay makes it look like it's already in recession. In August manufacturing industrial production fell by 1.6% following declines of 1% in July and 0.8% in June. Industrial production figures are adjusted for inflation, so these are real declines and the real decline in the U.K. industrial production is now 6.7% over 12 months. IP is falling at an 8.1% annual rate over six months and falling at a 13.2% annual rate over three months. These are substantial negative growth rates, and they are accelerating and there are declines across all sectors. The deceleration in growth also is across nearly all sectors, with two exceptions. Capital goods are a very minor exception because the year-over-year fall of 8.7% slows down slightly to a 7.8% rate of decline over six months before resuming at a 9.5% rate of decline over three months. Consumer durable goods also fail to show sequential deterioration but continue to show a good deal of weakness. Consumer durable goods output declines by 4.2% over 12 months, at an accelerated 6.4% annual rate of decline over six months, but then it slows to an annual rate of decline of 1.6% over three months. However, both consumer nondurable goods and intermediate goods show sequential real declines and acceleration in the rate of those declines over six months and three months, rounding out the picture of a fast-weakening manufacturing sector.

QTD growth U.K. data trends also show quarter-to-date declines and all the sectors show manufacturing output falling. Manufacturing output falls at a 10.9% annualized rate, two months into this quarter. Consumer nondurables has the sharpest decline in its QTD growth rate among sectors at -10.1%, but intermediate goods output at -9.4% is close behind, as is capital goods within a decline at an 8.5% annual rate. Consumer durables output is falling at a 4.5% annual rate, about half the pace of decline the other sectors.

Sectors ae mostly lower since Covid struck U.K. output has fallen sharply over the past year; the table documents it's down significantly over 12 months as are all the sector measures. As a result of those declines, U.K. output is now lower than it was pre-pandemic in January 2020. All sectors except for consumer nondurables show net declines as well. Consumer nondurables output is still 5% above where it was in January 2020. Overall output shows a short of its January 2020 level by 1.3%; capital goods output is the farthest behind, at 6.4 percentage points below its output level in January 2020.

Industry weakness is broad-based The bottom of the table shows trends for five key industries in the U.K. Only two of these industries fail to show sequential deterioration. One of the exceptions is textiles & leather where after falling by 5.9% year-over-year output trends fall at only a 2.6% pace over six months but then they collapse to fall at one of the stronger negative growth rates of -21.6% over three months. In the end, which makes it not much of an exception.

Not surprisingly utilities are an exception, but they still aren't very strong. Utilities output is up by 7.1% since before Covid struck. Sector output is up by 1.9% over 12 months. Growth in the sector is moderate to weak except for the 6.4% annual rate over six months. But after that, it's back to dead flat over three months. The monthly pattern for electricity, gas & water shows declines in August and July after a significant 2.7% increase in June.

Food, beverages & tobacco are up by 10.3% on that same timeline to before the point that Covid struck. But textiles & leather output is 13.1% lower, mining & quarrying is 14.4% lower and motor vehicle & trailer production is lower by 35.2%. The bottom line is since Covid only food and utilities output have expanded.

Summing up The U.K. economy is clearly under pressure and underwater. Output is declining and the declines are accelerating. There is a new government whose new policies have not been embraced that creates a political problem on top of the U.K. economic problems. On top of all that, of course, the U.K. is part of Europe and caught up in proximity to this Ukraine-Russia war situation. More importantly the Bank of England is fighting what is a clear inflation problem. In this environment, the bank has a difficult choice because inflation is still high, but the economy isn't just weakening, it's declining. That makes this a delicate time to be making monetary policy decisions in the U.K. since inflation is still cooking.