UK manufacturing ended 2014 on a soft, but much as expected note. A 0.1 percent monthly increase in output followed a stronger revised 0.8 percent rise in November and saw annual growth slip from 3.0 percent to 2.4 percent. Total industrial production was rather weaker, posting a 0.2 percent contraction versus November when output was unchanged to shave its yearly rise from 1.1 percent to 0.5 percent.
The minimal monthly advance in manufacturing output reflected gains in eight of the thirteen subsectors amongst which computer, electronic and optical products (6.7 percent) was easily the main driving force. The steepest fall was in other manufacturing and repair (3.6 percent).
Elsewhere total industrial production was hit by a 1.4 percent monthly decline in mining and quarrying (crude petroleum and natural gas extraction minus 3.1 percent) and a 1.6 percent reversal in utilities. Electricity, gas, steam and air conditioning expanded 0.6 percent.
Fourth quarter industrial production was up just 0.1 percent versus the third quarter (manufacturing 0.2 percent) but this was still stronger than the 0.1 percent dip assumed by the ONS in its preliminary estimate of real GDP. That said, the revision is small enough as to have no impact on fourth quarter growth, currently put at 0.5 percent. Looking ahead, the PMI surveys suggested that 2015 got off to a solid start and the comparable CBI report was similarly upbeat. Confidence in manufacturing seems optimistic and, notwithstanding issues with an increasingly uncompetitive level of the pound in Europe, this should be reflected in a decent gain in output this quarter.
Industrial production measures the physical output of the mining and quarrying, manufacturing, gas and electric, and water supply and sewerage sectors.
Industrial and manufacturing outputs are watched carefully by market participants despite the decline in the importance of manufacturing in the UK economy. Manufacturing output is the preferred number rather than industrial production which can be unduly influenced by electrical generation and weather. The manufacturing index is widely used as a short-term economic indicator in its own right by both the Bank of England and the UK government. Market analysts also focus on manufacturing and its sub-sectors to get insight on industry performance.
Industrial production accounts for less than 16 percent of the economy within which the key manufacturing sector is worth about ten percentage points. Total manufacturing is divided into thirteen sub-sectors, ranging from food, drink and tobacco through chemicals and chemical products to electronics and transport equipment. Consequently, this report has a big influence on market behavior. In any given month, one can see whether capital goods or consumer goods are growing more rapidly. Are manufacturers still producing construction supplies and other materials? This detailed report shows which sectors of the economy are growing and which are not.
Investors want to keep their finger on the pulse of the economy because it usually dictates how various types of investments will perform. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers more subdued growth that won't lead to inflationary pressures. By tracking economic data such as industrial production, investors will know what the economic backdrop is for these markets and their portfolios.