British Manufacturing Weakens while Home Prices Move Higher

The United Kingdom is seeing a weaker manufacturing sector, pressuring workers’ wages even as house prices continue to skyrocket and basic goods and services see accelerating inflation.

The United Kingdom is seeing a weaker manufacturing sector, pressuring workers’ wages even as house prices continue to skyrocket and basic goods and services see accelerating inflation.

Despite falling for most of 2015, manufacturing output fell again by 1.8% on a year-over-year basis in February, according to new data released by the UK’s Office for National Statistics. This contributed to an increasing trade deficit, which remained roughly stable at £12 billion in February versus £12.2 billion in January. Analysts had expected a decline in the deficit to £10.2 billion. The strength in the deficit was largely attributable to higher non-EU goods imports.

In an independent study by Markit Economics, UK is seeing protracted weakness in manufacturing, construction, and services, with most industries facing a contraction. Because of that weakness, Markit analysts expect GDP growth to fall to 0.4% in the first quarter of 2016, a deceleration from the 0.6% growth rate seen in the last quarter of 2015.

Meanwhile, prices faced by British consumers continue to rise. Home prices rose by 7.6% in February, further fueling fears that a housing bubble continues to plague the country. Southeast England, where foreign buyers are purchasing many stately homes and mansions, saw an 11.4% increase in prices, while London houses rose by 9.7%.

For core goods and services, high prices are also becoming a greater concern for British consumers. The inflation rate in the United Kingdom rose to 0.5%, according to an ONS study of the Consumer Price Index. The rising CPI remains below the 2% inflation target for which the Bank of England is hoping. Higher prices in services and some imported goods were offset by a decline in food prices.

In a much-anticipated reversal of a nearly two-year long trend, petrol prices were up because of rebounding oil prices.

Nonetheless, the ONS warned that Brits should pay more for goods and services, as analysts remain unsatisfied with the relatively low—albeit improving—rate of inflation. “Dearer clothing and higher air fares, influenced by the timing of Easter, are behind the rise in CPI, which is still low by historic standards,” said ONS analyst Phil Gooding.

The relatively low rate of inflation has emboldened the Bank of England to keep borrowing costs near historic lows, with a 0.5% target rate. Some analysts believe that rate is set to increase later in the year, especially if rising oil causes petrol prices to inflate the CPI further.

Most analysts, however, believe the Bank of England’s Monetary Policy Committee is likely to keep interest rates where they are, as inflation remains significantly softer than economists would like. Additionally, growing concern that competition with negative interest rates in EU member states could pressure the Bank of England to keep rates lower lest they discourage a higher trade deficit caused by further imports and cash repatriation into the UK.