Monthly output in July 2024 saw a notable decline, with the “Manufacturing” sector declining by 1.0%, driven by smaller declines in the “Electricity and Gas” sector by 1.7% and “Water Supply and Sanitation” by 0.7%. These declines were partly offset by a 3.9% increase in the “Mining and Quarrying” sector. This monthly decline in industrial output included declines in 7 of the 13 subsectors, with only one subsector recording an increase of more than 1%. The most significant negative contributions came from “Manufacture of Transport Equipment” and “Manufacture of Machinery and Equipment”, which fell by 2.3% and 4.7% respectively. On the positive side, the “Manufacture of Wood, Paper and Printing Products” sector recorded a growth of 1.6%, making the largest positive contribution to the manufacturing sector. Monthly output in July 2024 was estimated to have fallen by 0.8%, following a similar growth in June 2024.
Data impact on the British Pound:
The GBPUSD pair is attracting buyers’ interest for the second day in a row, supported by a slightly weaker US dollar. However, the upward momentum has slowed after disappointing economic data from the UK.
The pair has made a notable recovery from the 1.3050 area, its lowest level in three weeks, and has gained positive momentum for the second day in a row. However, despite this improvement, prices struggled to break above the 1.3080 level, retreating slightly after recent economic data.
According to the UK Office for National Statistics, economic growth remained stable in July for the second month in a row, missing expectations for a 0.2% growth. In addition, the UK recorded an unexpected contraction in industrial and manufacturing production, increasing the possibility of a Bank of England interest rate cut, which is weighing on the performance of the pound.
UK economy transformation: the services sector outperforms manufacturing
The UK economy is undergoing a major transformation, with the services sector becoming the main driver of growth, while the share of manufacturing in GDP has fallen to a historic low. This change reflects broader global trends, and is influenced by domestic factors such as Brexit and the growth of economic activity concentrated in London.
Recent data shows that the UK is now a leader in exporting services, such as finance, accounting, legal and management consulting, overtaking the export of goods, to become the first among the advanced economies in the G7. The gap between services exports and goods exports is widening rapidly.
At the same time, the contribution of manufacturing to GDP fell to an all-time low of 9.2% in the second quarter of the year, compared with 9.9% before the Covid-19 pandemic. Although factory output has increased by around 20% since the mid-2000s, growth in the sector has slowed in recent years. By contrast, services now account for 81.2% of UK economic output, up from less than 80% before the pandemic.
“The 0.5% growth in the three months to July is a positive sign,” said the head of research at the British Chambers of Commerce, noting that “the UK economy continues to expand at a steady rate in the second half of the year, with the services sector remaining the largest contributor to growth.” However, he added, “The flat monthly GDP growth for the second month running, coupled with challenges in the manufacturing and construction sectors in July, is a concern. Firms continue to struggle to increase investment and trade due to global economic and political uncertainty, which is limiting broader economic growth.” The ONS is expected to release updated figures later this month, which will provide further insights into these trends.
UK Manufacturing Production Impact on Financial Markets
The monthly UK manufacturing production report is a critical economic indicator reflecting the health of the manufacturing sector, which contributes significantly to the country’s GDP. Changes in industrial output can have a significant impact on financial markets, especially those closely linked to the UK economy, such as the pound, stock markets, and bonds.
Stock Market Reactions
UK stock markets, particularly companies in the industrial and manufacturing sectors, can experience volatility following the release of manufacturing production data. Positive results can lead to a rise in industrial stocks, as they indicate business growth and higher corporate earnings potential. On the other hand, disappointing data can lead to selling of related stocks due to concerns about falling earnings and a slowing economy.
Bond Market Impacts
UK government bonds are also sensitive to manufacturing data. Strong industrial output can reduce demand for bonds as investors move into riskier assets such as stocks. This can lead to higher bond yields. Conversely, weak manufacturing performance may push investors towards safe-haven assets, increasing demand for bonds and pushing yields lower.
Impact on the British Pound (GBP)
Manufacturing production data can impact the value of the pound. A higher-than-expected increase in industrial output typically signals economic strength, leading to expectations of higher interest rates by the Bank of England (BoE). This can boost demand for the pound, causing it to rise against other currencies. Conversely, a decline in manufacturing output or results that are below expectations may indicate economic weakness, which could lead to a decline in the value of the pound as investors anticipate lower interest rates or lower confidence in the economy.
