Finance

Pound drops as more gloomy economic data dampens hopes of an interest rate rise in August

The pound weakened this morning after more gloomy economic data dulled hopes of a rise in interest rates in the near future.

A drop in manufacturing and construction output in May suggest that the economy has struggled to gain strength after a weak start to the year, lowering the chances of the Bank of England deciding to raise interest rates this year.

Manufacturing output fell by 0.2 per cent in May compared to April, acting as the main drag on overall industrial production, which fell 0.1 per cent, official figures from the Office for National Statistics show.

The manufacturing figures were hit by a 4.4 per cent drop on the month in motor vehicle production, the biggest fall since February last year

A weaker pound was expected to boost manufacturing as it makes British products cheaper for foreign buyers.

The pound fell by 0.6 per cent against the dollar to $1.2891 and by 0.5 per cent against the euro to €1.1298 today.

The manufacturing figures were hit by a 4.4 per cent drop on the month in motor vehicle production, the biggest fall since February last year and matching industry figures showing a fall in new car registrations.

Moreover, the warmest May for nine years saw gas supplies drop 1.5 per cent on the month, as demand for heating took a tumble, pushing industrial production lower.

Meanwhile the construction industry also endured a difficult month, failing to reverse April’s 1.1 per cent decline by dropping 1.2 per cent in May against forecasts of 0.5 per cent growth.

The ONS figures add to other gloomy data released yesterday showing slower rates of expansion across manufacturing, services and construction – with the weakest rate of growth seen in the services sector, as weaker consumer spending had an impact.

Pound vs Dollar: The pound fell by 0.6 per cent against the dollar today

The latest composite PMI survey also showed that business activity rose at its weakest pace in four months in June, with business optimism falling amid rising uncertainty around the future of the country after Brexit.

Howard Archer, chief economic advisor to the EY ITEM Club, said it was ‘virtually certain’ that construction and manufacturing dragged down economic growth in the second quarter.

Manufacturing output fell by 0.2 per cent in May compared to April, acting as the main drag on overall industrial production The warmest May for nine years saw gas supplies drop 1.5 per cent on the month, as demand for heating took a tumble, pushing industrial production lower

He added: ‘Based on today’s data and the business survey results for June, we now think that industrial production is likely to have contracted by 0.5 per cent in the second quarter, with construction output down 1.8 per cent.

‘And though an improved performance from the services sector will provide some support, GDP is likely to have grown by just 0.3 per cent with the risks to that projection skewed to the downside.’

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the industrial production data increased the likelihood of the Bank of England’s Monetary Policy Committee keeping interest rates on hold at 0.25 per cent.

He said: ‘May’s industrial production figures provide more evidence that GDP growth has not sped up in the second quarter, increasing the likelihood that the MPC stands pat next month.’

Mixed messages: The Bank of England is divided about whether raising interest rates or not

The Bank of England has sent mixed messages on rates, although the consensus is that in the case of the Bank hiking the base rate this year, it will only raise it by a small 0.25 per cent to bring it back to 0.5 per cent.

Governor Mark Carney said last month after that ‘now is not yet the time’ to raise rates, only to be contradicted by chief economist Andy Haldane, who revealed he may vote for a rate hike in the second half of the year.

Other gloomy news from today come from trade data, as the UK’s deficit in goods and services – the gap between exports and imports – widened by £1billion to £3.1billion between April and May, with economists’ expecting a figure for £2.5billion.

Meanwhile in the housing market, Halifax reported a 1 per cent fall in house prices in May.

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