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U.K. Manufacturing Activity Accelerates in August

The British economy has been dogged by a weak pound and weak consumer spending of late, but the upside of a weak currency is a big tailwind for manufacturers and other exporters. It appears as if those exporters are putting the boost they are getting to good effect.

The Markit Purchasing Managers Index (PMI) for the UK in August hit a four month high of 56.9, compared to expectations of 55.0. The PMI is a dispersion index, meaning that any reading about 50 indicates expansion. July’s PMI reading for the UK was 55.1.

Rob Dobson, director at IHS Markit, said: “The UK manufacturing sector continued to show signs of solid progress during the third quarter, with rates of expansion in output, new orders and employment all gathering pace in August. The key question is whether this positive start to the second half of the year can be sustained.”

While exports were a source of strength, domestic orders in the UK economy appeared to be the main driver of the strong reading. Job creation also accelerated to a thirteen month high in the manufacturing sector.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The pick up in the PMI brings tentative hope that the recent decline in the official manufacturing output data will be reversed swiftly. The manufacturing sector, however, should be doing even better, given sterling’s huge depreciation and the emergence of a strong recovery in the eurozone.”

The weaker pound sterling both improves export competitiveness and raises consumer costs, as well as raw material prices for the exporters themselves. That could ultimately lead to tighter policy by the Bank of England. Michael Saunders was one of two individuals to vote against leaving interest rates at current levels last month. Speaking in Cardiff, he said,

“Sterling’s depreciation and higher global growth have led to a sharp pickup in export orders and export
profitability since mid-2016. Export volumes (goods, ex oil and erratics) in H1 this year rose 6% on the prior half year, a pace that has not been exceeded since 2006 (when, unlike now, exports were significantly inflated by MTIC-related fraud). Even allowing for the more sluggish trend in exports of services, and the knock-on boost from higher exports to higher imports23, the export pickup is likely to add meaningfully to economic growth this year and the next. Moreover, the CBI reports that the net balance of manufacturers of intermediate goods reporting a rise in domestic orders hit a record high in Q2, which may signal a rise in the domestic content in UK manufacturing output over time.”

While manufacturing is only about 10% of the British economy, the news is certainly welcome to policy makers which have contended with declining growth throughout 2017 as well as a spate of terrorist attacks earlier this year.

 

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