LONDON (Reuters) – UK manufacturers reported their slowest production growth since May last month, hit by delays related to Brexit and COVID-19, and consumers cut borrowing sharply in January when they were put back on hold.
The UK economy is expected to contract sharply in early 2021, although manufacturers are optimistic later in the year if they expect an end to lockdown restrictions.
The speed at which households recover will also be crucial. Bank of England data showed that January consumer credit suffered the largest annual decline since records began in 1994, up 8.9%.
The UK entered a third national lockdown in January, closing schools, non-essential stores, restaurants and most other businesses open to the public, although people can still drive to work if necessary.
Treasury Secretary Rishi Sunak has announced additional support of £ 5 billion ($ 7.0 billion) to service companies and plans to offer more aid in an annual budget on Wednesday.
“All eyes are now on Wednesday’s budget to see if the Chancellor has any surprises up her sleeve that will give companies in the (manufacturing) industry a boost for the second half of the year,” said Simon Jonsson, partner at the Auditing company KPMG.
The BoE expects the economy to contract 4% in the first three months of 2021 – a bigger decline than any quarter of the 2008-09 financial crisis, albeit significantly less than the 20% decline last spring.
Low consumer borrowing indicates a decline in spending on non-essentials. Official retail sales data showed total purchases were down 8.2% in January.
Some of the weak borrowing also reflects the repayment of loans by wealthier households.
The BoE expects pent-up household savings to be released after the lockdown ends, but the extent of any recovery is uncertain.
The manufacturing industry has outperformed the consumer-oriented sectors. Nonetheless, the IHS Markit / CIPS Purchasing Managers’ Index (PMI), the key manufacturing component, showed a further decline in growth in February after a sharp decline in January.
“The ongoing disruption related to COVID-19, now compounded by the careful navigation of manufacturers in the new UK-EU trade deal, has created a scenario where logistical and supply-side challenges limit the rate of economic recovery,” said James Brougham, an economist at Make UK industry association.
The broader purchasing managers’ index for the manufacturing sector reached a two-month high of 55.1, slightly higher than the preliminary values suggest.
Much of the increase, however, reflects longer lead times and higher costs – which have been associated with increased activity in the past but have been a constraint more recently.
Confidence for the coming year was the highest in more than six years. This is despite new post-Brexit customs regulations that came into force in January and increased the cost and complexity of trade with the European Union, especially for smaller companies.
The cost of materials rose as quickly as it has for four years, and delivery times have also been greatly extended.
($ 1 = 0.7164 pounds)
Reporting by David Milliken and William Schomberg; Editing by Hugh Lawson