UK factories pick up the pace keep rate hike in view

Reuters

By William Schomberg and David Milliken

LONDON, Oct 10 (Reuters) - British factories had their strongest two months of 2017 in July and August, suggesting the Bank of England remains on track to raise interest rates soon, but the deficit in trade in goods hit an all-time high.

Despite the improvement in manufacturing, the data showed Britain's economy remained in a low gear in the third quarter after suffering its slowest first half to the year since 2012.

The BoE believes last year's Brexit vote will create more inflation pressure by dampening business investment and slowing migration to Britain.

Sterling rose after Tuesday's official data and British government bond prices edged down.

"They're not storming figures but I think they're good enough to keep the Bank of England on track for a November rate hike," said Victoria Clarke, an economist with Investec.

She said revisions to past data which showed a stronger than previously thought picture for manufacturing and the broader industrial sector would also add to the case for a BoE hike.

Most economists expect the BoE to move as soon as Nov. 2, when it announces the outcome of its next meeting.

The Office for National Statistics said manufacturing output rose by a monthly 0.4 percent in August, matching July's pace.

That compared with a forecast for output to rise 0.2 percent in a Reuters poll of economists. The last time growth among manufacturers was stronger was in December of last year.

A fall in car production in Britain was more than offset by output of metal products and pharmaceuticals, the ONS said.

Overall industrial output -- which includes the factory sector -- rose by a monthly 0.2 percent in August, compared with 0.3 percent in July and in line with the Reuters poll.

Industrial output accounts for 14 percent of Britain's overall economic output.

Figures for the much bigger services sector are due to be released on Oct. 25, along with a preliminary first estimate for third-quarter gross domestic product growth, little more than a week before the BoE's Nov. 2 announcement.

Many economists say only a shock weakening in those figures is likely to cause the BoE to delay raising rates.

The ONS said in the three months to August manufacturing output picked up speed to grow by 0.7 percent, its strongest pace since February. Industrial output also gathered momentum, growing by 0.9 percent.

A private-sector business survey last week suggested manufacturers saw a loss of momentum in September although price pressures grew. The official readings of manufacturing have tended to show a weaker picture for the sector than the surveys.

NO EXPORT BOOM

The ONS data showed Britain's goods trade deficit with the rest of the world hit an all-time high of 14.245 billion pounds ($18.77 billion) in August, pushed up by increased imports of chemicals, machinery and textiles.

Economists polled by Reuters had expected the deficit would narrow to 11.20 billion pounds.

Exports of goods rose 0.7 percent on the month while imports jumped 4.2 percent, their biggest rise since March.

So far there has been little sign that exporters have taken advantage of the fall in the value of the pound to increase their volumes of sales abroad.

The ONS also released figures for construction output in August which grew by 0.6 percent from July, its first monthly increase since May, and was up 3.5 percent on the year.

The Reuters poll had pointed to no change on the month and a small annual increase of 0.2 percent.

($1 = 0.7589 pounds)

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