UK factory growth slows and price pressures rocket again

Sterling bets crushed on weak data, Brexit

LONDON, Oct 2, (RTRS): British manufacturing growth cooled last month as cost pressures lurched higher, according to a survey that could put the Bank of England a step closer to raising interest rates, despite a murky outlook ahead of Brexit.

Monday’s IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to 55.9 from a downwardly revised 56.7 in August, undershooting the consensus of 56.4 in a Reuters poll of economists.

By contrast, eurozone factories had their best month since early 2011.

While the PMI survey signalled solid expansion at British factories, helped by robust exports, softer growth in new orders and a slowdown among producers of investment goods raised concern about the months ahead.

Britain’s economy initially withstood the shock of the June 2016 vote to leave the European Union. But growth began to slow sharply this year as inflation rose following the pound’s post-Brexit vote plunge, hitting households.

Against that background, the BoE surprised investors last month when its officials said they were likely to raise interest rates soon, citing a reduced tolerance for above-target inflation.

Analysts said Monday’s survey — which showed a resurgence of price pressures — would do little to alter this judgement.

“While the weaker economic backdrop is unlikely to deter the Bank from hiking in November, it does mean that the chances of a series of rate hikes after that are low,” said James Smith, economist at ING.

Costs paid by factories for goods shot up at the fastest pace since March, the PMI showed, spurred in part by an increase in commodity prices and capacity constraints in the supply chain.

“Emerging problems in the supply chain, signalled by lengthening lead times, are likely related to the subdued investment performance of the past few quarters,” said Lee Hopley, economist at manufacturing association EEF.

IHS Markit, which compiles the survey, said this would probably exert further upward pressure on prices, dent profitability and potentially disrupt production schedules in coming months - boosting the case for higher rates.

The PMI’s gauge of British manufacturing export orders slowed for a second month. While still much stronger than its historical average, it lagged the euro zone’s by some distance.

A majority of economists polled by Reuters last week expect the BoE will raise interest rates in November.

Meanwhile, Sterling fell one percent to a three-week low on Monday as manufacturing surveys added to a string of recent data releases showing the British economy was struggling to gain momentum.

Investors took profits after the pound posted its biggest monthly performance in two years in September as expectations rose the Bank of England’s rosy outlook on the economy was at odds with underlying data and as governing Conservatives gathered for what could be a fraught party conference.

Markets focused on Brexit negotiations after Britain’s junior Brexit minister said he was hopeful that EU negotiators would agree to move on to discuss future relationships in October, even after the head of the European Commission said it would take “miracles” for that to happen.

“We have been a bit sceptical about the positive noises emerging from the Bank of England on the economic outlook and that conviction has been borne out of the recent data prints,” said Daniel Loughney, a fixed income portfolio manager at AllianceBernstein.

Monday’s data showed manufacturing growth in Britain cooling in September as cost pressures rose. Data on Friday showed gross domestic product growth slowed to 1.5 percent year on year in the second quarter while the current account deficit increased more than expected. and

“Markets have priced in about one rate increase but given the state of the economy, it is very difficult to see how can they increase interest rates a few more times.”

The soft streak in data came at a time when long positions in sterling flipped into positive territory for the first time in a year, indicating the latest weakness in sterling may have more room to run as market positioning was more neutral.