British industrial and construction output suffered a shock fall in January, raising the risk the economy will slide back into recession at a time that rising oil prices are posing a dilemma for policymakers.
Friday's data from the Office for National Statistics will put extra pressure on finance minister George Osborne to find measures to boost growth as he prepares to unveil his 2012 budget on March 21, and may raise the chances that the Bank of England will extend its asset purchase programme in May.
Industrial output shrank by 0.4 percent in January, wiping out December's gains and confounding economists' forecasts for a 0.3 percent rise. None of the economists polled by Reuters had expected a fall this month after a string of upbeat private-sector surveys, and the annual decline of 3.8 percent was the biggest in more than two years.
"Today's disappointing industrial figures ... suggest that the manufacturing recovery is already starting to lose steam," said Capital Economics's Samuel Tombs. The fall in British production was driven by a slump in oil and gas output. The energy sector was a persistently weak in 2011 due to unplanned maintenance, unfavourable weather and a long-term decline in Britain's North Sea energy reserves. But factory output, which accounts for the lion's share of industrial production, was also weaker than expected, growing by just 0.1 percent compared to forecasts of 0.3 percent. Overnight, Britain's main manufacturers' association, EEF, had said factory output rebounded at the start of 2012 and that firms expected output and orders to grow at their fastest pace in a year over the next three months.
Further bad news came from the construction sector. Non-seasonally adjusted output fell 12.3 percent in January after an 11.8 percent decline in December, according to the ONS, despite relatively good weather over the period. Consumer price inflation is currently 3.6 percent, and is forecast to fall below target by the end of the year. Bellwether retailer John Lewis reported a 4.4 percent rise in weekly sales earlier on Friday, and a Lloyds survey showed consumer sentiment at a six-month high. The latest BoE survey of public inflation attitudes, also published on Friday, suggests these remain in check for now, with forecasts for the year ahead sinking to an 18-month low of 3.5 percent.