Feb. 9 (Bloomberg) -- U.K. manufacturing jumped in December by five times as much as economists forecast and the total trade deficit shrank to the smallest since 2003, pointing to signs of economic strength at the end of last year.
Factory output increased 1 percent from the previous month, the Office for National Statistics said today in London. Economists forecast a 0.2 percent increase, according to the median of 25 predictions in a Bloomberg News survey. The trade gap in goods and services narrowed by more than half to 1.11 billion pounds ($1.7 billion), the lowest since April 2003.
The reports point to an improving economy at the end of a quarter when the economy shrank 0.2 percent. While indexes of services, manufacturing and construction all showed growth in January, the Bank of England may still expand stimulus today to protect Britain from Europe’s debt crisis.
The data “give hope that the first-quarter outturn will be better than people even feared just a few weeks ago,” George Buckley, chief U.K. economist at Deutsche Bank AG in London, said in an interview. Still, “the recovery is very fragile. There’s huge event risk from Europe still in the mix.”
The European Central Bank will keep the benchmark interest rate at a record-low 1 percent today, according to 55 of 57 economists in a Bloomberg News survey. Two predict a cut to 0.75 percent. The decision will be announced at 1:45 p.m. in Frankfurt and President Mario Draghi will then face questions on the ECB’s possible role in helping Greece reduce its debt.
The Bank of England will raise its target for bond purchases to 325 billion pounds at noon today in London, according to 34 of 50 economists in a Bloomberg survey. Fifteen forecast a 75 billion-pound increase and one no change.
Out of 13 categories of U.K. manufacturing, four fell on the month and nine rose, the statistics office said. Transport equipment rose 3 percent and the manufacture of food, beverages and tobacco increased 1.3 percent. Factory output, which accounts for 10 percent of gross domestic product, fell 0.8 percent in the fourth quarter from the July-September period.
Overall industrial output, which includes mines, utilities and oil and gas and equals 15 percent of GDP, rose 0.5 percent on the month. It fell 1.4 percent in the quarter, more than the 1.2 percent decline estimated in growth data last month. The ONS said the revision would have a “minimal impact” on GDP.
Separate data showed the goods-trade deficit narrowed to 7.11 billion pounds in December from 8.91 billion pounds the previous month, as imports plunged 3.6 percent, outpacing a 0.4 percent drop in exports. The trade balance in services stayed in surplus at 6 billion pounds, little changed from November.
A Treasury spokesman said in an e-mailed statement that the reports are positive and show signs of rebalancing in the U.K. economy. Bank of England Governor Mervyn King says Britain needs a shift away from consumer spending toward net trade to drive economic growth.
The data do show “some genuinely encouraging news on the U.K. economy, with manufacturing output rebounding,” Howard Archer, an economist at IHS Global Insight in London, said in e- mailed notes. Still, “the trade statistics have little real evidence of underlying marked improvement, and doubts persist that stronger exports can boost overall growth and help the U.K. economy to become more balanced.”
The British Chambers of Commerce said yesterday that an increase in the central bank’s quantitative-easing program is “necessary.”
“It remains a critical bulwark for the U.K. financial system and the wider economy,” BCC Chief Economist David Kern said in a statement. “The challenges facing the U.K. economy and the ongoing problems in the euro zone highlight the need to sustain confidence.”
Elsewhere, data in China today showed inflation unexpectedly accelerated in January on the boost to spending from a weeklong holiday. That may limit room for monetary easing as Europe’s debt crisis damps exports and the property market cools. Consumer prices rose 4.5 percent from a year earlier.
Separately, Commerce Minister Chen Deming said China’s exports probably declined in January after a slowdown in foreign trade in the second half of last year. The data are due tomorrow, with analysts forecasting a 1.4 percent decline in overseas shipments from a year earlier.
Also in Asia, Japan’s machinery orders fell at the fastest pace in three months in December, the Cabinet Office said in Tokyo. Spending may rebound as post-earthquake reconstruction work kicks in, and today’s report showed companies forecasting a 2.3 percent increase in orders this quarter.
--With assistance from Gonzalo Vina, Mark Evans and Scott Hamilton in London. Editor: Eddie Buckle, Craig Stirling
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