UK economic data weakens, casting doubt on BoE rate hike talk

By Andy Bruce and Jonathan Cable

LONDON (Reuters) - Output by British factories unexpectedly fell in May, suggesting the economy has struggled to gain much momentum after a slow start to 2017 and raising questions about the likelihood of the Bank of England raising interest rates this year.

The weak data also comes just as businesses are pressing the government to negotiate a smooth exit from the European Union with a leading employers group saying Britain should stay in the single market for a transition period.

Executives from leading British companies are due to meet Brexit minister David Davis on Friday.

Sterling slipped to a nine-day low against the euro and British government bond prices rose after the economic data.

The Office for National Statistics said manufacturing output edged down by a monthly 0.2 percent, cancelling out its rise in April and confounding forecasts for a 0.5 percent rise in a Reuters poll of economists.

Construction figures were also much worse than expected. In the three months to May construction output was down 1.2 percent, the sharpest such drop since October 2015.

"It's all building up a pattern here that says the economy is clearly losing momentum," said Peter Dixon, economist at Commerzbank.

"It's not pointing to a particularly dynamic second quarter. Under those circumstances, the timing of the hawks on the Monetary Policy Committee pushing for a rate hike doesn't look great," he said.

Britain's economy slowed in early 2017 after initially withstanding the shock of the referendum decision to leave the EU in June 2016.

Consumers, who are the main drivers of growth, have reined in their spending as inflation rises quickly, pushed up by the post-Brexit vote fall in the value of the pound.

Still, some Bank of England policymakers are pushing for the first interest rate hike in a decade.

Rate-setter Michael Saunders this week said he was "reasonably confident" that an improvement in exports and investment would more or less compensate for the consumer slowdown.

The manufacturing figures were hit by a 4.4 percent drop on the month in motor vehicle production, the biggest fall since February last year and tallying with industry figures showing a fall in new car registrations.

Broader industrial output fell 0.1 percent in May after a 0.2 percent rise in April.

Separately on Friday, mortgage lender Halifax said house prices rose at the slowest annual pace in four years, potentially weighing on consumer confidence.

Trade data for May also looked weak.

The goods trade deficit increased to 11.863 billion pounds ($15.33 billion) in May from 10.595 billion pounds in April, the ONS said, wider than all forecasts in the Reuters poll.

Things looked brighter in terms of volumes of goods exported in the three months to May, which rose 3.8 percent. By comparison, import volumes rose 2.8 percent over the same period. However, business surveys have cast doubt about whether an improvement will be seen in the months ahead.

($1 = 0.7740 pounds)

(Editing by Hugh Lawson)