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    UK industrial output grows less than expected in March; sterling slides

    Industrial production in the United Kingdom made a tepid recovery in March following a sharp contraction the previous month. Total production rose by 0.3% month-on-month in March, cancelling out all of the previous month’s drop. However, the figure was below expectations of a more robust bounce back of 0.5%. On an annual basis, output was down 0.2% from the same month in 2015.

    Manufacturing growth was also positive, but only barely. Manufacturing production expanded by just 0.1% in March from the previous month, missing estimates of a 0.3% increase. Compared to the same period a year ago, output was 1.9% lower – the largest annual fall since May 2013.

    The only bright spot was upward revisions to the previous months’ figures. Industrial output in January was revised up from 0.2% to 0.6% m/m and February’s reading was revised from -0.3% to -0.2% m/m. Manufacturing production was also revised higher with February’s 1.1% slump revised to a lesser 0.9% drop.

    The biggest downward effect on industrial output over the month came from the mining and quarrying sector, which contracted by 0.4% m/m. The largest positive contribution came from the electricity and gas sector, where output rose by 3.3% m/m. Within the manufacturing sector, the fastest growing sub-sector was the manufacture of transport equipment, which saw a 2.7% m/m increase in output, mainly as a result of higher car production. Food and beverages production underperformed though as output declined by 1.4% m/m.

    The pound slipped against the dollar and the euro after the disappointing data, which added to the recent run of weak data for the UK economy. Sterling hit an intra-day low of 1.4394 dollars before rebounding to around 1.4430 dollars in mid-European session. The euro meanwhile briefly peaked above 0.79 pounds before easing to 0.7893.

    The disappointing set of figures for March are likely to be taken as further evidence that the UK economy is going through a soft patch, with the upcoming EU referendum seen as contributing to the slowdown. The Bank of England has already said that the June referendum of Britain’s membership in the EU is likely to cause businesses to put spending plans on hold until after the outcome of the vote.

    The BoE’s Monetary Policy Committee starts its two-day policy meeting today and will announce its decision tomorrow, along with the publication of the Bank’s latest quarterly inflation report. Brexit risks and the weak performance of the manufacturing sector are likely to be mentioned in the report. But it should be interesting to see how these are weighed against the recent gains in oil prices for the inflation outlook ahead.

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