Industrial output fall raises recovery fears

LONDON (Reuters) - Industrial output suffered a shock fall in January, raising fresh doubts that the economy will rebound after its contraction at the end of 2011 as rising oil prices pose a fresh challenge to growth.

Friday's data from the Office for National Statistics will put extra pressure on finance minister George Osborne to find measures to boost the economy as he prepares to unveil his 2012 budget on March 21, and may boost 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.

"Today's disappointing industrial figures provide further evidence to suggest that the manufacturing recovery is already starting to lose steam," said Capital Economics' Samuel Tombs.

The fall was driven by a sharp drop in oil and gas output. The energy sector has been a persistently weak performer in 2011 data 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.

This was a particular surprise given relatively strong recent surveys from purchasing managers' and industry bodies.

Overnight, Britain's main manufacturers' association, EEF, said factory output had rebounded at the start of 2012 and that firms expect output and orders to grow at their fastest pace in a year over the next three months.

But a pick-up in factory gate inflation and businesses' input costs, shown in separate ONS data on Friday, caused some analysts to doubt whether the BoE would have scope to provide further stimulus to the economy.

February producer output prices rose by an annual 4.1 percent, above forecasts for a reading of 3.9 percent, after a sharp rise on the month for input costs for crude oil and home-produced food.

The figures may worry members of the BoE's nine-strong Monetary Policy Committee who are concerned that consumer price inflation will not fall as rapidly as the central bank predicts from its current level of 3.6 percent.

In its latest projections, the Bank of England forecast CPI would fall to below its 2 percent target by the end of this year and stay there until 2014.

Tensions in the Middle East have driven UK petrol prices to new record highs in recent weeks, and the PPI data showed crude oil input costs rising at their fastest monthly pace since September, when consumer price inflation hit a three-year high of 5.2 percent.

"Sticky inflation would maintain the squeeze on consumers' purchasing power and make it harder for the Bank of England to do more quantitative easing should the economy continue to struggle," said IHS Global Insight economist Howard Archer.

Other economists drew comfort from a BoE survey, also released on Friday, which showed that public inflation expectations had fallen to their lowest level in 1-1/2 years in February - although they still see prices rising faster than the BoE's 2 percent target.

(Reporting by David Milliken and Fiona Shaikh; Editing by Catherine Evans)

Source: http://news.yahoo.com/industrial-output-suffers-shock-january-fall-raises-recovery-094040110.html

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