UK factories keep up strong growth, inflation pressure builds
LONDON (Reuters) – Britain’s factory sector maintained most of its robust growth last month after a weaker pound boosted exports, though this also fueled inflation, according to a survey that underscored the impact on the economy of June’s Brexit vote.
The Markit/CIPS Purchasing Managers’ Index (PMI) slowed slightly to 54.3 from an upwardly revised 55.5 in September, which was its highest level in more than two years.
“The UK manufacturing sector remained on a firm footing in October and should return to growth in the fourth quarter,” Rob Dobson, an economist at compiler Markit said.
Data has already shown that Britain’s economy fared much better than expected by the Bank of England and economists in the three months after the June 23 decision to take the country out of the European Union.
The BoE is widely expected to hold off from a fresh interest rate cut on Thursday, in view of the economy’s resilience so far since the vote and the nearly 20% fall in the value of the pound against the dollar.
“It looks as if the manufacturing sector’s fortunes improved at the beginning of the fourth quarter,” Capital Economics analyst Paul Hollingsworth said, adding that the figures pointed to quarterly growth for the sector of 1% versus a 1% contraction in the previous quarter.
Markit said the slump in sterling had boosted exports by manufacturers in October, although they showed a little bit less growth than in September and domestic demand was also strong. Others were less upbeat. “We continue to expect manufactures to struggle to capitalize on the weak pound in the near term, given the usual delays involved in finding new business, renegotiating contracts and investing in extra capacity,” Pantheon Macroeconomics’s Samuel Tombs said.
Markit said the inflationary impact of the weaker currency was also becoming increasingly evident. Import prices showed one of the steepest rises in purchasing costs in the near 25-year history of the survey.
Around 90% of companies offering a reason for increased costs made some reference to the sterling exchange rate, Markit said. Factory gate prices rose at the steepest pace since mid-2011.
“If signs of ongoing solid output expansion and rising price pressures are also experienced elsewhere in the economy, the chances of a further cut in interest rates before year-end are virtually nil,” Dobson said.
The fall in sterling is expected to push the BoE to raise its inflation forecasts on Thursday to show a bigger overshoot of its price target than at any time since it gained independence in 1997.