UK Manufacturing Up, Inflation Expectations Down

UK Manufacturing Up, Inflation Expectations Down

More good news for the UK, as manufacturing continues to improve and inflation expectations drop, giving the Band of England some much-needed breathing room.

UK Manufacturing Up, Inflation Expectations Down

While down from June’s impressive 2.0 percent month-on-month increase in manufacturing output, the UK added another 0.2 percent in July, and analysts are expecting strong third quarter results. “This is in line with expectations but it is impressive nevertheless because it follows such an outsize gain the previous month,” says Societe Generale analyst Brian Hilliard. There are also signs of strong gains in August, though no hard numbers as of yet. Industrial production was flat, mining output fell 0.5 percent, and utility output dropped 2.2 percent month to month, but there are still signs that the recovery is in swing. Industrial production is expected to grow 1.3 percent sequentially next quarter. GDP growth could be as high as 0.7 percent quarter on quarter, priming the British economy to fully rebound in 2014.

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UK manufacturing rebound

UK inflation to fall

Investors are also expecting inflation to fall in the UK according to a Bank of England survey. “The Attitudes to Inflation survey brought some good news with expectations at all three horizons (1, 2, and 5 years) falling,” says Hilliard. The BoE announced that it would keep interest rates at 0.5 percent, a decision that was met with widely varying reactions, but anchoring inflation expectations has been a goal of BoE, so this news can be taken as a sign of success.

UK inflation expectations

Expectations for output growth

“This should help put a floor under firms’ expectations of output growth as well as unemployment, in the same way that the inflation target helped put a ceiling on inflationary expectations and inflation and therefore stimulate corporate spending,” said Peter Spencer, senior economic adviser to the EY Item Club, reports Jennifer Rankin for The Guardian.

Rates will remain low until British unemployment falls to 7 percent, a decision that closely mirrors the criteria the U.S. Federal Reserve has used for the end of qualitative easing. While that could happen as early as the first quarter 2014 in the U.S., it could be a couple of years before the UK gets its employment rate straightened out and interest rates go back to normal.

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