Industrial Growth Weakens as Low Oil Prices Dent Output

10th April 2015

Data released today by the Office for National Statistics (ONS) showed that UK industrial production grew by just 0.1% year-on-year in February, the lowest rate since August 2013. Manufacturing output, the largest component of the sector, rose by 1.1%. However, mining and quarrying output was down 6.0% compared with February 2014.

The sharp decline in mining and quarrying output has largely been driven by the UK's oil and gas industry. Brent crude prices have remained below $60 a barrel for much of 2015. While only a small share of the world's oil production is unprofitable on a cash basis at these levels, much of what is unprofitable is in mature offshore regions such as the North Sea. As such, the UK's oil and gas output sector noticeably declined compared with a year ago, falling some 12% year-on-year, with a number of the North Sea's smaller fields temporarily shut-in and production at others restricted.

While the declines in the extractive industries have noticeably dented the annual growth in industrial production as a whole, the continued expansion of manufacturing output is encouraging. Despite yesterday's trade figures showing a slowdown in external demand, manufacturing output grew 0.4% between January and February 2015 supported by stronger domestic demand since the beginning of the year.

Falling levels of business investment have become a concern for the UK economy and while it's clear that uncertainty with regards to the outcome of the general election in May has weighed on business confidence, structural issues may also be playing a role. Businesses, particularly those in manufacturing, continue to report relatively high levels of spare capacity. As such, continued expansion in the sector will play a role in supporting future business investment. While annual growth in the manufacturing sector has slowed, growth has been heavily reliant on falling input prices and a stronger domestic market. With global economic activity likely to pick up later in 2015, the prospects for UK manufacturers should recover in the second half of the year.