Confidence in the UK’s manufacturing sector posted a surprise fall in November, as the weak pound exerted pressure on manufacturers buying materials from abroad.
The manufacturing purchasing managers’ index (PMI) fell to 53.4, down 0.8 points since last month, although rates of expansion are still "solid", according to survey compiler IHS Markit.
This was the second month of decline in confidence in UK manufacturing, but PMI remained well above the neutral 50 point, indicating that sentiment is still broadly positive.
Rob Dobson, senior economist at IHS Markit, said: “Scratching beneath the surface of the data shows that rising consumer demand and business-to-business spending is helping manufacturing to grow at a robust clip.”
UK manufacturing PMI dipped below 50 in July as panic over the implications of the vote to leave the European Union took hold, but confidence quickly recovered to pre-referendum levels.
However, the one definite effect of the Brexit vote has been the fall in the value of the pound. Exporters have enjoyed a boost as foreign buyers find British products to be cheaper in their currency, but the export boost will be counteracted over time by the rise in costs for British imports of materials.
“The concern is that higher costs may in time offset any positive effect of the weaker exchange rate, especially given that export order book growth has already waned markedly from September’s five-and-a-half year high,” he added.
The UK’s manufacturing sector is comprises a relatively small proportion of the country’s services-dominated economy: services account for 78.8 per cent compared to production’s 14.6 per cent, according to the Office for National Statistics.
Nevertheless, the UK’s manufacturing PMI is an important bellwether for the nation’s economic health.
Government and the Bank of England (BoE) will watch the figures closely to determine how Britain’s economy responds to the vote to leave the European Union.
The BoE’s governor said yesterday that the main risks to the UK economy come from outside the country, in the form of instability of China and the US. However, he also said that businesses need to know “as much as possible as early as possible about the potential path” that the UK will take.