World Economy

Britain Focuses on Manufacturing

Britain Focuses  on ManufacturingBritain Focuses  on Manufacturing

Survey data published this week seems to show economic momentum in the UK moving away from consumption-led growth and towards manufacturing.

Growth in the country’s dominant services sector eased in January to the slowest pace for four months, according to a report on industry purchasing managers published on Friday, NewsNow reported.

The Markit/CIPS index fell to 54.5 from 56.2 in December. This was still its sixth consecutive month above the 50 level, which indicates growth. Anything below this suggests contraction.

This moderation follows other surveys that have pointed to a fall in consumer borrowing and confidence. Lloyds Bank, for example, found customers were spending more on essentials because of higher prices.

Official retail sales figures, due in two weeks, will confirm if the apparent slowdown is genuine.

The PMI survey for manufacturing on the other hand, published earlier this week, reported an acceleration in growth, indicating that the fall in the pound could help the UK rebalance away from a consumer-driven and services-based economy to one focused on exports and manufacturing.

This survey also found manufacturing cost pressures rising at their fastest monthly rate since 1992 which—as UK exports often include materials imported from abroad—could limit the pace of any rebalancing.

  Rising Costs

According to Friday’s data, services companies were also experiencing increasing cost pressure due to the fall in the pound, although more modestly than in manufacturing. The rate of input price inflation rose to the highest level since March 2011.

Rising prices will probably constrain growth for services this year, said Scott Bowman, UK economist at Capital Economics. Many analysts expect that increases this year will begin to erode consumer spending power.

Mark Carney, Bank of England governor, said on Thursday that one of the biggest reasons the bank got its forecast of economic growth wrong following the EU referendum was a failure to anticipate that people would keep spending.

Their latest forecast predicts that savings rates will fall to their lowest level since 1963 this year as households borrow to cope with the rise in prices rather than cutting back on spending.

Whether this forecast is correct will be central to growth during the next few years. If consumer spending falls sharply instead then so should economic activity.

Friday’s services PMI might even overestimate growth in the services sector, said Samuel Tombs, chief UK economist at Pantheon Macroeconomic, as “it excludes retailers, who likely will find that consumer demand crumbles as they pass on higher import prices”.

The “all sector” PMI, which includes construction and manufacturing alongside services, fell to 55.2 in January from a 17-month high of 56.5 in December.

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