Industrial production in UK weakens

Industrial output fell much more than expected in May, official data showed yesterday, raising the possibility that economic growth came to a near standstill in the second quarter.

Sterling fell and the FTSE 100 index of leading shares lost early gains as the weak data encouraged investors to scale back their bets that interest rates will rise this year to tame high inflation. The Office for National Statistics said industrial production fell 0.8 per cent on the month, well beyond analysts' expectations of a 0.1 per cent decline. That left output 1.6 per cent lower than a year ago, the biggest decline since December 2005.

The contraction was driven by a much sharper than expected decline in manufacturing output, which fell 0.5 per cent on the month and was down 0.8 percent on the year.

"It looks like we are going to experience broad-based weakness in the UK economy throughout the second half of the year, which should be enough to keep interest rates from rising," said Philip Shaw, an economist at Investec.

The ONS said record high temperatures in May had pushed electricity, gas and water output down by 5.2 percent - the biggest fall since October 2001 - adding to weakness in the broader industrial production measure.

Economic growth slowed to just 0.3 per cent on the quarter in the first three months of the year and second quarter growth is now likely to have weakened further. More up-to-date surveys have already been showing a contraction, raising fears that the economy could plunge into a recession.

However, policymakers also face the strongest inflation since the Bank of England was granted the power to set interest rates in 1997. No change in official borrowing costs is expected this week.