UK’s Manufacturing Sectors Strengthens Pound

UK’s Markit/CIPS purchasing managers' index (PMI) for the month of August has shown a distinct increase, reaching a 10-month high of 53.3 from 48.3 in July.

The fact that the index has now surpassed the 50 point mark indicates that an expansion is currently taking place. The rebound in manufacturing sector is being attributed to the sharp decline in the value of the pound after the Brexit vote, which boosted exports.

The pound dropped by almost 10 percent in the aftermath of the British vote for exiting the European Union (EU). The decline in the pound has however also increased manufacturing costs.

According to Markit, the PMI increase in August was the joint-largest ever in the history of the survey. The encouraging news prompted the pound to rally, rising by 1 percent to $1.33 before settling slightly lower.

In a statement, Rob Dobson, senior economist at IHS Markit said,

The August PMI data indicate a solid rebound in the performance of the UK manufacturing sector from the steep downturn that followed the EU referendum. The domestic market showed a marked recovery, especially for consumer products, while the recent depreciation of sterling drove higher inflows of new business from the US, Europe, Scandinavia, Middle East and Asia.

Dobson however added that the rising cost of imports was affecting inflation in the country, resulting in an increase. He pointed out that both input prices and output charges had recently hit five-year highs as a result of elevated import costs. The PMI survey results are in line with the results from the CBI survey released last week which showed that the growth in export orders was at its highest in two years.

The relatively weak PMI result in July had been one of the key reasons for the Bank of England’s decision to ease monetary policy and cut interest rate to 0.25 percent. The latest result could now cause questions to be raised on its policy.

Laith Khalaf, senior analyst at the investment firm Hargreaves Lansdown said that British consumers and businesses were carrying on as usual in the aftermath of the referendum given that Britain’s exit from the EU was still a fair distance away. Khalaf said that the economic data being gathered over the past few months could result in policymakers having a rethink in adopting further easing policies.

Experts are awaiting the results of the PMI results for the services sector, which is the largest segment for the UK which could offer further insights into the state of the economy.

Charlie Harrison

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