Stagflation: meet economic collapse. The UK basket case is getting very, very ugly, with today's obliteration of Industrial Production putting in doubt expectations of a BOE hike. From AP: "British industrial production fell 1.2 percent in February from January, an official report said Wednesday, marking the largest monthly fall since August 2009 and far worse than analyst expectations for an increase of 0.2 percent. The Office for National Statistics said a 7.8 percent drop in oil and gas extraction was the main reason for the fall, while the manufacturing sector was flat." And the winner: "It may be that the industrial recovery is past its peak," said Samuel Tombs, U.K. economist at Capital Economics. Industrial production accounts for 17 percent of British GDP." That's the bad news; the good news is that with runaway inflation which is now surging at 5%+ the economy has got to be improving: after all where would all this demand be coming from if not from some massive latent recovery. Oh wait, what's that you say: endless liquidity? You don't say. Well, never mind then. In other news GBP crosses get obliterated as rate hike expectations are put on hold. In fact what you can put on the front burner is more money printing, both at the BOE and the Fed because central banks are so much more adept at "controlling" inflation than deflation.
Not even Goldman could spin this data. From Goldman Sachs:
BOTTOM LINE: Headline industrial production was much weaker than expected in February (-1.2%mom versus Cons: +0.4%), driven by sharp falls in oil and gas extraction (-7.8%mom) and utilities output (-2.1%mom). This lowers our 'bean count' for the ONS's Q1 GDP data from +0.8-0.9%qoq to +0.6-0.7%qoq, but the uncertainty surrounding the preliminary Q1 GDP data remains substantial. Manufacturing output (which excludes utilities and energy supply) was unchanged on the month. This was also weaker than expected (Cons, GS: +0.6%mom), but the downside surprise was smaller than to overall IP.
1. Both headline IP and its manufacturing output component surprised on the downside. The larger surprise in the former was driven by a sharp decline in utilities output (-2.1%mom) and oil and gas extraction (-7.8%mom) - both of which are not part of manufacturing output. Taken together, the components of this morning's release push our Q1 GDP 'bean count' down from +0.8-0.9%qoq to +0.6-0.7%qoq (Table 1). Construction output for February is released on Friday and this will be the final input into the Q1 GDP data available before 27 April. We will further refine our estimate of the Prelim GDP in light of Friday's data but, even after this, the uncertainty around the Q1 print will remain substantial.
2. The GDP implications of the particularly weak non-manufacturing components of headline IP must be seen in the context of the lower weight the MPC places on them. In assessing the underlying path of output, policymakers tend to strip out both utilities output (because it is volatile and largely driven by the weather) and oil and gas extraction (again because it is volatile, but also because it is not very labour intensive, predominantly offshore and internationally-owned). According to the ONS, mining and quarrying experienced a seasonally unusual slowdown due to maintenance work, and utilities output contracted partly due to mild weather in February. That's not to say that zero sequential growth in manufacturing output through February is not disappointing (consumer durables output was the largest drag, registering -2.9%mom), but the downside surprise in this component is smaller than the disappointment in headline IP.
3. One would need manufacturing output growth of around ½%mom in March to surpass the Q4 growth rate of +1.1%qoq registered in Q1. As Chart 1 shows, the latest Manufacturing PMI readings remain consistent with very strong growth - around 10% annualised (more than 2%qoq non-annld).
4. A number of clients have asked us what reading of the ONS's Preliminary Q1 GDP we think would be sufficient for the MPC to hike in May? We don't think there is a precise answer to this question - much as the MPC has appeared to emphasize the importance of this release, other factors (the strength of survey data and pay deals, to name just two) are clearly influential also. That said, it seems likely that growth of +0.8%qoq would be sufficiently strong (as this is what they forecast in the February Inflation Report), while +0.5%qoq or below (implying zero growth over Q4 and Q1 together) is likely to be too weak. Our central forecast remains that the first hike will take place in May, but we will revisit this question in light of the Q1 GDP release on 27 April.
5. Also released today, the headline employment index in the Report on Jobs gave back some of its sharp February increase, falling three points from 62.7 to 59.7 in March. As a reliable leading indicator of private-sector jobs growth in the past, the Report on Jobs is consistent with private-sector employment growth of close to 2% annld.in Q1 (Chart 2). That would be more than enough to cover prospective public-sector jobs losses (0.3% of private-sector employment per year) and trend workforce growth (0.7%-0.8%).