Sterling tumbles after UK manufacturing growth unexpectedly shrank in March

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Growth in the sector has missed expectations for two months in a row (Source: Getty)

The pound fell against both the euro and the dollar this morning after closely watched figures showed UK manufacturing growth shrank unexpectedly.

Markit's Purchasing Managers' Index, which measures growth in output, fell to 54.2 in March, down from 54.6 in February - and almost a whole point below the 55.1 analysts had expected. Any figure below 50 denotes a contraction in the sector.

Sterling dropped 0.3 per cent against the dollar, to $1.2507, and 0.5 per cent against the euro, to €1.1722, on the news, as investors reacted to the second unexpectedly low figure in as many months, and the sector's weakest expansions in the past eight months.

"Sector data suggested that the slowdown was centred on consumer goods producers, with the pace of output growth in that industry only modest," said Markit.

Martin Beck, senior economic advisor to the EY Item Club, said: “Since the manufacturing PMI reached a two-and-a-half-year high last December, the story has been one of a gentle decline in the index."

He added: “Looking forward, the sector’s prospects will represent the outcome of a battle between the activity-depressing effect of higher inflation versus the positive boost from the weak pound and a better global outlook.”

The survey did present some signs this was happening, with foreign demand rising and the rise in input costs slowing, with overall activity still remaining well above the neutral 50 mark.

Paul Hollingsworth, an economist at Capital Economics, said: "The slight fall suggests that the sector saw a slight slowdown in the first quarter, but nonetheless, is still performing fairly well by recent standards."

However, while the sector is still expanding, there is so far little to suggest the downward trend will reverse.

“With growth losing further momentum in March, that weaker trend is likely to continue into the second quarter," said Rob Dobson, senior economist at IHS Markit. 

"The latest survey also clearly shows that high costs and weak wage growth are sapping the strength of consumers, with rates of expansion in output and new orders for these products slowing further."

However, Markit pointed out today's figure was above long-term averages, with the domestic market providing extra new business for manufacturers. 

"The latest PMI reading compared favourably to its long-run trend (51.6). The average over the opening quarter as a whole (54.7) was identical to the prior quarter’s near three-year high.

"The intermediate and investment goods sectors both registered substantial and accelerated rates of increase."

“Despite the slight drop in confidence, firms continue to perform well," added Dave Atkinson, head of manufacturing at Lloyds Bank Commercial Banking. 

"Outputs and orders are still ahead of expectations, production remains strong and some exporters are still benefitting from the lower value of sterling.

“Although another successive month of slowing growth is disappointing, the underlying trend remains strong. Both home and overseas markets are contributing to growth and we hope to see firms’ confidence remain above the long-term average in the months ahead.”

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