Written by Colin Sanders
Posted on 27/06/2017

Manufacturing soars on a weaker pound

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Rising concerns that the UK could miss out on an economic rebound due to poor performance by the manufacturing sector in April have been allayed.

After a strong end to 2016, weak figures this year had left economists dismayed, as manufacturing rose just 0.2%, according to the Office for National Statistics (ONS). The economy appeared to have lost momentum in the first quarter of 2017: the slowdown led to the UK losing its place as the fastest growing G7 economy, exacerbated by poor manufacturing performance and a mixed outlook for the construction sector.

Although the trade deficit shrank in March, this was due to a fall in imports. Indeed, exports stayed flat in April, at £49.8 billion, while imports fell from £53.7 billion to £51.9 billion, creating an artificially positive trade deficit reduction.

A rapid turnaround

However, in a move that surprised economists, following the negative data earlier in the year UK manufacturing has since soared, driven by a weak pound and a global recovery.

In fact, Britain’s manufacturers are currently experiencing the strongest demand for products in nearly 30 years, with order books boosted by the exchange rate creating cheaper exports. Both export and total order books have risen to the highest level in decades, according to the CBI, with particularly strong demand across food, drink, tobacco and chemicals.

In a survey of 464 factory bosses, the balance of companies recording above normal order books rose from +9 percentage points in May to +16 in June. This represents the highest level since August 1988. Similarly, export orders are at their joint highest level in 22 years, with the balance rising from +10 points to +13 points.

Economists are viewing the data hopefully, anticipating that a stronger manufacturing sector may stave off some of the negative effects that higher inflation is creating on consumer spending.

Cost pressures

Despite the uplifting figures, the CBI has cautioned that manufacturers are still being affected by rising prices, however.

Rain Newton-Smith, the CBI’s chief economist, said: “Britain’s manufacturers are continuing to see demand for ‘Made in Britain’ goods rise with the temperature. Total and export order books are at highs not seen for decades, and output growth remains robust.

“Nevertheless, with cost pressures remaining elevated, it’s no surprise to see that manufacturers continue to have high expectations for the prices they plan to charge.

“To build the right future for Britain’s economy, manufacturers and workers, the government must put the economy first as it negotiates the country’s departure from the EU. This approach will deliver a deal that supports growth and raises living standards across the UK.”

Although strong manufacturing output will hopefully offset a slowdown in the UK’s services sector, inflationary pressures and stagnating wage growth are still expected to slow down economic growth this year.

The mixed news comes as rating agency Standard & Poor’s urges the Prime Minister to accelerate Brexit negotiations, warning that a hard Brexit will lead to another credit rating downgrade for the UK. With much hanging in the balance, the economy will need to be handled carefully.