Britain’s manufacturing sector is on a roll. With a weaker pound making exports cheaper, the latest health check shows industry recording its best performance in 30 months.
The upbeat mood in UK factories is only partly about the fall in the value of the pound since the EU referendum in June. Firms are also benefiting from solid growth in domestic demand. All manufacturing sectors did well, with the higher output of investment goods helping to dampen fears that firms are cutting back on capital goods ahead of the launch of the UK’s divorce talks with the EU.
Order books are strong, suggesting that manufacturing will support growth in the first few months of 2017.
A few words of caution are needed though. To be sure, the purchasing managers’ index produced by CIPS/Markit shows manufacturing doing a lot better than forecasters expected at the time of the Brexit vote.
But in recent months there has been a disconnect between the upbeat CIPS/Markit surveys and the much more sombre official data. The last set of figures from the Office for National Statistics only cover October, but they showed manufacturing output down by 0.9% on the month and by 0.4% on the year.
As a result, manufacturing will need to post an impressive performance in both November and December if it is to contribute to the ONS’s measure of growth for the fourth quarter of 2016.
The downside of a depreciating currency is that the boost to exports comes at the expense of dearer imports, and the CIPS/Markit provides evidence of upward price pressures on manufacturing.
Two factors will determine whether the resilience of the economy in the second half of 2016 continues into 2017. The first is the extent to which manufacturers and retailers absorb the impact of higher import costs in their profit margins rather than passing on the inflationary impact of a falling pound to consumers.
The second is the extent to which exporters break with tradition and take advantage of a more competitive currency by boosting market share rather than raising their prices.
