The UK’s manufacturing PMI for October, a measure of growth in the sector, was 54.3.
The figure is a slight miss from forecasts but IHS Markit, which prepared the figure, says the sector remains “on a firm footing” and “should return to growth” in the fourth quarter.
But one of the data company’s senior economists warns that the fall in the pound since Brexit is having an increasingly negative effect on the sector, suggesting things could take a turn for the worse in future.
Economists were expecting October’s IHS Markit figure to come in at 54.5, a slowdown from September’s figure of 55.4. The PMI reading, given between 0-100, measures activity in the sector — anything above 50 signals growth, while anything below means contraction.
IHS Markit, which draws up the figure, says the slight slowdown comes as “weaker exchange rate raises input costs and new export orders.”
In other words, while the cost of raw materials imported to manufacture things is getting higher, the weaker pound is also boosting demand for British goods.
Sterling has fallen close to 20% against the dollar since Britain voted to leave the European Union on June 23. Brexit supporters had said that this fall should provide a boost to manufacturing, as it makes British goods cheaper for overseas buyers.
However, Deutsche Bank said in a note earlier this month that this view was overly simplistic as it much of what Britain manufactures, in fact, relies on imported raw materials. Rob Dobson, a senior economist at IHS Markit,
Rob Dobson, a senior economist at IHS Markit, says in the press release announcing Tuesday’s PMI figures: “The downside of the weaker currency is becoming increasingly evident.” Purchase price inflation rose to a 69-month high and is the fourth highest on record since the survey began in 1992.
Here’s the full statement from Dobson:
“The UK manufacturing sector remained on a firm footing in October and should return to growth in the fourth quarter. Despite slowing from September’s highs, growth of output and new orders continued to defy expectations, rising at marked rates and supporting the fastest job creation in a year.
“The main topic of the latest PMI survey was, however, the impact of the sterling depreciation on manufacturers. On the positive side, the boost to competitiveness drove new export order inflows higher, providing a key support to output volumes. The downside of the weaker currency is becoming increasingly evident, however, with increased import prices leading to one of the steepest rises in purchasing costs in the near 25-year survey history. Around 90% of companies offering a reason for increased costs made some reference to the sterling exchange rate.”
On the plus side, IHS Markit reports a “marked expansions of new business and production,” with new orders coming from the USA, EU, and China.
“New order volumes increased for the third consecutive month and at a pace close to September’s recent high,” the data company says. “Companies reported higher demand from both domestic and export clients.”
However, IHS Markit also found that average selling prices of manufactured goods are increasing at the fastest rate since June 2011 as a result of rising raw material costs. This suggests that the orders boost could be short-lived.
The fate of Britain’s manufacturing sector post-Brexit has been in focus recently, with Nissan agreeing to keep its car manufacturing presence in Sunderland only after personal assurances from the prime minister. This has led to scepticism about whether the government will be able to keep its promises in the face of tough EU negotiations and what failing to meet its promises might mean for the wider manufacturing sector.