Posted on 30/05/2017

Manufacturing growth in the UK jumps to three-year high

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The UK’s manufacturing sector has been a key force in the country’s economic recovery. Indeed, both the manufacturing and construction sectors demonstrated significant growth last year and contributed to a strong end to 2016.

This unexpected improvement helped narrow Britain’s trade gap and saw the goods and services deficit reduced by £300 million – falling to £3.3 billion. The reason for the shrinking gap between exports and imports lay in the increase of goods exported to non-EU counties, which surged by a value of £1.1 billion to reach £43.8 billion in the last quarter of 2016. What’s more, the better-than-expected performance by the manufacturing sector also contributed to the country’s growth in GDP – which rose from 0.6 percent to 0.7 percent, according to the Office for National Statistics (ONS).

This year, the UK lost its place as the fastest growing G7 economy, handing over the mantle to Germany. With weaker performance across other sectors and low productivity, the country is counting on the services, manufacturing and construction sectors to bolster economic performance this year, as our European exit looms. However, it seems the good news for manufacturing persists.

April data feeds positivity

Factories in the UK demonstrated their fastest growth for three years in April – due to strong domestic and foreign demand, according to the most recent IHS Markit/CIPS UK manufacturing Purchasing Managers Index.

While a Reuters poll of economists had been anticipating a modest slowdown of activity in April to 54.0, business activity actually leapt from 54.2 in March to 57.3 in April (any reading above 50 indicates manufacturing growth). The industry benchmark’s jump in performance will likely temper some concerns about the impact of Brexit on the economy. Indeed, the manufacturing sector is particularly crucial for the nation as it comprises around one-tenth of the UK’s economy.

What’s more, figures from the Index revealed that, not only did the sector enjoy the strongest pick-up of new work since the start of 2014, firms also employed staff at a swifter pace and increased their production. The reason behind this uptick is that the pound’s post-Brexit fall in value has helped increase the export of goods, which are now cheaper for foreign markets.

The downside of cheaper exports

However, it’s not all good news. The currency imbalance means that import costs have risen for the UK, which is typically a net importer. Indeed, the first three months of 2017 saw the UK economy slow significantly. GDP growth was slower than expected due to inflation and higher import costs, which in turn impacted the cost of living and consumer spending. Economists are anticipating a continued slowdown as higher inflation costs continue to impact consumer spending – which plays a central role in economic health.

Samuel Tombs, the chief UK economist at the consultancy Pantheon Macroeconomics, says:

“One quarter of slow growth is not definitive proof that the economy is on the ropes. But the pressure on consumers’ incomes looks set to build this year as retailers pass on higher import prices.”

Positive news from Europe

Despite concerns of inflationary pressures, the latest data from Europe is providing some reassurance. Although inflationary costs lie like a dark cloud on the horizon, an improving global outlook will likely provide a relatively supportive environment for UK manufacturing. Eurozone factory growth recently hit a six-year high and the strength of Eurozone countries will hopefully fuel UK export demand.

Despite the positive indicators, Rob Dobson, senior economist at IHS Markit, advised a cautious interpretation of the upswing in the UK’s manufacturing data, saying:

“The big question is whether this growth spurt can be maintained, especially given the backdrop of ongoing market volatility and a number of political headwinds such as elections at home and abroad. Other surges seen since the middle of last year have generally proved short-lived, as weak wage growth sapped consumer spending.”

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