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Sterling soars as UK manufacturing sector bounces back

Published 01/09/2016

The Markit/CIPS UK Manufacturing purchasing managers' index hit 53.3 in August, up from 48.2 in July
The Markit/CIPS UK Manufacturing purchasing managers' index hit 53.3 in August, up from 48.2 in July

The pound has soared after the manufacturing industry threw off the shackles of Brexit uncertainty last month to record its biggest month-on-month rise in output for 25 years.

The Markit/CIPS UK Manufacturing purchasing managers' index said companies were taking "a business as usual" approach, as activity swung to a 10-month high in August following a slump in the immediate aftermath of the EU referendum result.

The closely watched survey said output hit 53.3 last month, up from a revised reading of 48.3 in July and above economists' expectations of 49.

A reading above 50 indicates growth.

The update caused sterling to jump 0.8% against the US dollar, breaking through the 1.32 barrier to reach 1.324 dollars. The pound was also up 0.9% against the euro at 1.188 euros.

The PMI survey in July suggested the manufacturing sector was in the doldrums following Britain's vote to leave the European Union, with Brexit uncertainty hampering growth and forcing the industry to a 41-month low.

But manufacturing activity rallied in August, matching the highest month-on-month increase since the survey began nearly 25 years ago.

The resurgence was driven by a rebound in manufacturing output and incoming orders, with new business seeing an upturn in the UK and abroad.

The slump in sterling to 31-year lows following the EU referendum result has made British products cheaper, boosting export orders to a 26-month high, with increased demand from the US, Europe, China, south-east Asia, the Middle East and Norway.

However, the fall in the value of the pound proved a double-edged sword, as input price inflation rocketed to a five-year high, with 44% of companies reporting a jump in purchasing costs.

There was also a brighter picture for manufacturing recruitment as employment grew for the first time this year, albeit at a low level.

The boost to jobs came from small and medium-sized manufacturers, while bigger firms trimmed their workforces.

David Noble, group chief executive at the Chartered Institute of Procurement & Supply, said the report showed "the Brexit brakes are off".

"An increase in stock building could signal more positive hope for the coming months," he added. "But it remains to be seen whether this expansion of activity is merely filling the post-Brexit void or whether this strong performance will continue."

The higher-than-expected manufacturing PMI for August lifts the prospects of the UK economy continuing to grow in the third quarter, despite widespread fears that Britain could slip back into recession.

The update comes after strong consumer spending helped the economy expand in the run-up to the EU vote in June.

The Office for National Statistics (ONS) confirmed last week that gross domestic product (GDP) grew by 0.6% in the second quarter, up from 0.4% in the first three months of 2016.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said the manufacturing data adds to a picture of improved sentiment since the fallout of the referendum result.

"We're by no means out of the woods economically speaking, and of course challenges remain, but it certainly seems that companies and consumers alike are carrying on with business as usual now the referendum is disappearing into the rear view mirror."

He said the sharp improvement in sentiment calls into question the Bank of England's decision to cut interest rates from 0.5% to 0.25% at the beginning of August.

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