Sterling plunges after manufacturing output surprises everyone by shrinking

It is a truth universally acknowledged that markets don’t like surprises. Lo and behold, manufacturing output dropped 1.3% in May instead of the 0.4% economists had predicted, sending the pound down as much as 0.3% against the dollar. As of 11.46am sterling was 0.09% down at $1.7114. A weaker pound will undoubtedly help exports, but the biggest monthly fall in manufacturing output since January 2013 and the first drop in six months could be nothing more than a blip.

Output in the quarter to the end of May was still up 1.1% on the previous three months and 3.7% higher year-on-year, according to the Office for National Statistics. As Markit’s chief economist Chris Williamson put it, ‘this easing will not worry policymakers unduly, unless of course it is followed by a further slump in June’.

German industrial production had a similar stumble yesterday, down 1.8% in May. David Tinsley, the chief economist at BNP Paribas suggested both might be down to ‘production plans… affected by the relative lateness of Easter’.

The drop in production also contrasts with a survey from the British Chambers of Commerce out today that reported 51% of manufacturers expected their profits to increase in the next year. That was a record high, as was the 42% that told the BCC their domestic sales had increased.

Exports and investment are down in both manufacturing and services, though, according to the BCC. Combined with the surprise fall in production, the chorus of business leaders calling for interest rate rises to be postponed have yet more ammunition to aim at the Bank of England.