UK Production Rebounds From Horrific April Numbers; Economic Weakness Remains

THE TAKEAWAY: IP & MP rebound > Economic activity still looks unstable > Pound remains under pressure

UK manufacturing and industrial production both rebounded from dreadful showings in April, which was blamed on a host of reasons ranging from the royal wedding to Japan’s earthquake and tsunami. Industrial production in May expanded by 0.9% rebounding from its 1.7% drop in April but missed expectations of 1.1%, the annual figures, however, posted a second consecutive contraction of 0.8% (after dropping 1.2% in April) the first such consecutive contraction since early 2010. On the manufacturing front, the numbers were much firmer coming in at 1.8% month-on-month beating expectations of 1.0% and 2.8% year-on-year beating consensus forecasts of 2.1%.

The Office for National Statistics (ONS) has been working hard to convince the market that the recent run of weak data has been due to external causes, as mentioned above, and will likely hope that these numbers serve to prove that the corruptive impulses in recent months have run their cause and the rebounds in the numbers show the health of the economy. While the ONS may have an optimistic outlook we are more wary and the domestic and external headwinds, which are already taking their toll on the UK economy and look set to persist for a good while.

The pound was little moved in lieu of the mixed data which gives mixed signals; while the data rebounded from the recent weakness it isn’t clear that it shows true economic strength and slowing global growth is likely to take its toll on the UK economy too. A significant slowdown in the UK economy could be a major problem for the government as they slash 330,000 public sector jobs as they try to reign in the deficit. A sharp slowdown could see a marked rise in unemployment and a further dampening of consumer confidence which will have serious repercussions across the economy. As such, despite the little movement from GBP/USD we favour an imminent close below 1.60 which will lead to a test of recent range lows by 1.5915 which will then open the door to deeper setbacks.

Written by Jonathan Granby, DailyFX Research Team