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Manufacturing output slows down as firms hit by higher import costs

Published 01/12/2016

The closely watched Markit/CIPS UK Manufacturing purchasing managers' index said manufacturing output hit 53.4 in November
The closely watched Markit/CIPS UK Manufacturing purchasing managers' index said manufacturing output hit 53.4 in November

Output in Britain's manufacturing industry eased back last month as firms grappled with sharply higher import costs caused by the Brexit-hit pound.

The closely watched Markit/CIPS UK Manufacturing purchasing managers' index (PMI) said output hit 53.4 in November, down from 54.2 in October and below economists' expectations of 54.5.

A reading above 50 indicates growth.

Growth slowed from September's 27-month high when the industry rebounded from a significant slump in the wake of Britain's vote to leave the European Union.

However, output and new orders remained solid, with rising consumer demand and business-to-business spending helping manufacturers push ahead.

Sterling's post-Brexit vote fall sparked a rise in new business abroad , with demand increasing from America, mainland Europe and the Middle East.

Despite the export boost, the plunge in the pound remained a thorn in the side of firms, with average purchase prices rising at one of the fastest rates in the survey's history and close to October's near six-year high.

Rob Dobson, senior economist at IHS Markit, said the survey showed that the manufacturing industry remained in "good health" throughout November.

"Although the recent growth spurt showed further signs of slowing, the pace of expansion is still solid and above its long-term trend.

"This should be sufficient to ensure manufacturing is a positive contributor to fourth-quarter GDP."

He added: "Eight-four per cent of manufacturers offering a reason for higher purchase prices made at least some reference to rising import costs due to the exchange rate."

Inflation is on course for a sharp jump next year as sterling's 18% slump against the US dollar and 11% drop versus the euro feeds through to consumer prices.

The PMI report said there were signs that the jump in input costs was already being passed down to customers through higher selling prices.

The Office for National Statistics reported last month that the currency fall had ramped up costs for manufacturers in October, with the Producer Prices Index (PPI) showing total input prices rising 12.2%, compared with a 7.3% rise in September.

The pound's weakness also helped push up output prices to 2.1% last month from 1.3% in September, the ONS said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said evidence of sterling's fall boosting manufacturing output remained "conspicuously absent".

" Sterling's depreciation is still doing little to support production because exporters have raised sterling prices sharply, offsetting the boost to competitiveness.

"The rebalancing of the economy towards exports likely will be even more protracted than in the past, given the deterrent to investment from uncertainty about the UK's future trade relationships."

The Organisation for Economic Co-operation and Development (OECD) upped its forecasts for the UK economy on Monday, despite warning over higher inflation and slowing investment following the Brexit vote.

It raised its projections for Britain's gross domestic product (GDP) from 1.8% to 2% for this year and from 1% to 1.2% for 2017. It expects UK growth to hit 1% in 2018.

It comes after t he independent Office for Budget Responsibility (OBR) recently predicted that the Brexit vote would wipe 2.4% off UK economic growth over the next five years, while average earnings will rise by less than 5%.

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