Rocketing oil and gas production masks weak underlying trend in industrial production

Chris Papadopoullos
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The figure was a "small slice of positive news for the sector" (Source: Getty)

A surge in oil and gas output lifted industrial production to a four-year high in August, figures from the Office for National Statistics showed this morning - but economists have warned the underlying trends are still weak.

Total industrial production, which is mostly manufacturing but also includes mining, quarrying and utilities, climbed 1.9 per cent on the year.

The sector, which makes up 15 per cent of the economy, was boosted by a whopping 25.6 per cent year-on-year increase in oil and gas output. Admittedly, the figure is no stranger to volatility - but it's still unusually high

However, economists said underlying trends remained weak, especially in manufacturing.

Despite rising on the month, manufacturing output was 0.8 per cent below the level it reached in August 2014 and remained 6.5 per cent below pre-recession levels.

Manufacturers, who account for the majority of industrial production, have battled against sluggish demand from key export markets such as the Eurozone. That's largely thanks to weak economic growth and a strong pound, which makes their goods less competitive in foreign markets.

“The superficially solid data outturn in August disguises more troubling underlying trends,” said economist Ross Walker from RBS.

“August’s industrial production surge stemmed from an 8.7 per cent month-on-month jump in oil and gas extraction: hence, this sector alone accounted for 90 per cent of the rise in total industrial production in the month.”

“The reason to be wary of the oil and gas-inflated UK industrial production numbers is that the North Sea is one of the most expensive offshore basins on the planet, with relatively old (and expensive to maintain) kit.”

Citi economist Michael Saunders points out that manufacturing declined over July and August, after posting falls in the first and second quarters of the year.

“Hence, on the standard definition of two consecutive quarters of falling output, manufacturing was already in recession in the second quarter and seems likely to remain in recession in the third quarter,” Saunders said.

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