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    UK: IP likely to make a positive contribution to Q2 GDP – RBC CM Sandeep Kanihama

    Research Team at RBC Capital Markets, notes that the UK industrial production (IP) in April surprised to the upside by quite some way. Key Quotes“Output was up 2.0% m/m versus the consensus expectation of 0.0% m/m. Confounding the dismal survey indicators the strength was concentrated in manufacturing production (69% of IP). Growth here was 2.3% m/m, despite the Markit/CIPS manufacturing PMI having dipped below 50.0 into contractionary territory in April.On inspection, it turns out that the growth in manufacturing production was dominated by two sectors; pharmaceuticals and transport equipment. Together these two of twelve sub-sectors in manufacturing accounted for almost two-thirds of the overall contribution of manufacturing production to the IP expansion. The ONS reference anecdotal evidence that an increase in exports drove the strongest performance in pharmaceutical products since February 2014 of 8.6% m/m.Outside of manufacturing production, it was also a good month for production of electricity and gas, with anecdotal evidence reported of an increased volume of gas used for the purpose of generating electricity leading to a 0.3ppt contribution to the total IP gain of 2.0% m/m.It remains to be seen whether the jump in pharmaceutical production (down 2.4% m/m last time), and transport equipment, is sustainable for the rest of Q2. On balance, the survey evidence suggests it will be a challenge for Q2 IP to maintain the April level.Nevertheless, with this impressive start to Q2, there is a better probability of IP making a positive contribution to Q2 GDP than previously thought. This is however, the first piece of hard data counting towards Q2 GDP, but it may assuage some fears about the magnitude of an EU referendum-related slowdown in GDP growth in Q2. Our forecast for Q2 GDP remains 0.3% q/q.”


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