UK Factory Output Growth Weakens

Britain’s manufacturing growth slowed more than expected last month, casting doubt on the strength of the economy as Bank of England policy makers hold their crunch meeting.

IHS Markit’s Purchasing Managers Index for the industry fell to a three-month low of 54 in July, from 54.3 in June, the firm said in a report Wednesday. The reading was below economists’ estimates for a figure of 54.2, Bloomberg reported.

Markit said output growth slowed to a 16-month low, with production of intermediate goods falling for the first time in two years. A weaker expansion of new work from domestic sources offset a stronger increase in export orders, while positive sentiment among manufacturers slid to a 21-month low, amid concerns over Brexit uncertainty and the exchange rate.

“Manufacturing started the third quarter on a softer footing,” said Rob Dobson, director at IHS Markit. “Manufacturing has failed to provide any meaningful boost to headline GDP growth through the year-so-far,” while the data on new orders and business optimism suggest the “industry is unlikely to exit this soft patch in the near future,” he said.

The report comes in the week of the Bank of England’s August meeting, at which investors currently see a more-than 90% chance of an interest-rate hike. Markit’s report on Britain’s dominant service sector, forecast to show a slight slowdown in growth, isn’t due to be released until Friday morning, a day after BOE officials announce their decision.

 Traders Shun Sterling

Pound sterling eased lower Wednesday after July’s IHS Markit manufacturing PMI left traders with little incentive to place big bets on the currency ahead of the BoE interest rate decision due Thursday.

Mismatch between expectations and the actual outcome is miniscule but it is deviation against expectations that moves currency markets. Poundsterlinglive reported.

The pound was quoted 0.05% lower against the US dollar at 1.312 following the release and is down 2.85% for 2018, while the pound-to-euro exchange rate was unchanged at 1.122.

Despite the data missing expectations, the index still rests comfortably above its long-term average of 51.8, the data was enough to leave the British currency treading water.

A slower pace of orders for intermediate goods, which are components used in the process of manufacturing other finished products, was the primary driver behind the downturn in July. Investment goods producers and the consumer goods industry both fared relatively well during the month.

“The output balance (which has the best relationship with the official figures) posted a larger decline, from 55.3 to 54.0. But that still leaves it consistent with quarterly growth in manufacturing output of 0.3%, which would be a substantial improvement on the 1.2% 3m/3m contraction in the latest hard data for May,” says Andrew Wishart, an economist at Capital Economics.

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

 Optimism Drops

Markets care about the data because, covering Britain’s three largest commercial sectors, they are an important indicator of momentum within the economy. And economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dictate where interest rates, which are the raison d’etre for most moves in exchange rates, will go next.

“Optimism about the outlook for output over the next 12 months dropped in July to its lowest level since October 2016. Admittedly, manufacturers’ pessimism might reflect fears that the US-EU trade war would escalate, which they might no longer hold.

“Note that the survey was conducted between July 12 and 26, largely before President Trump and Jean-Claude Junker agreed to de-escalate the trade war on July 25,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics.

Manufacturing has been a relative bright spot for Britain’s economy ever since the Brexit vote of June 2016, with the double digit fall in the pound making British goods cheaper for overseas customers to buy, while a robust domestic economy has also fuelled demand.

This saw industrial firms experience eight consecutive quarters of output growth in the period to the end of 2017, marking the longest expansion for the sector since 1988, although momentum has waned recently. The IHS PMI has fallen from 58.2 in November 2017 to 54.0 in July 2018.

The outlook for the economy is clouded after GDP growth fell by half during the first quarter to just 0.2%, down from 0.4% at the end of 2017. Data released so far suggests the economy rebounded in the second quarter, although most expect an annual expansion of only 1.5% for 2018 overall, which would be down from the 1.7% seen in 2017.