Monday 24 October 2016 1:00 pm

Manufacturing exports surge on weak sterling but higher costs are on the horizon

Manufacturing exports have jumped to their highest level in two and a half years in a Brexit boost for the sector following the dramatic slide in the value of sterling.

The CBI's Industrial Trends survey also found UK firms were the most competitive they have ever been up against their European counterparts since the introduction of the euro in 2000. 

Despite talk of a possible 'hard Brexit', a string of good economy data has buoyed the sector's outlook for the future, with the optimism index – which looks at manufacturers' expectations for the coming year – rising from minus 47 in September to just minus eight in the October reading. However, a reading of overall activity in the industry disappointed, falling from minus five to minus 17 and well below economists' expectations.

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Sterling has fallen from $1.48 against the dollar on the night of the referendum to below $1.23 recently, with events such as the 'flash crash' and Brexit rumours out of the Conservative Party Conference helping to nudge the currency lower. The pound will also be in the spotlight next week as the Bank of England meets for a finely-poised monetary policy decision which could see interest rates taken even closer to zero.

UK-based firms also reported their strongest competitiveness against non-EU competitors since the financial crisis, in another sign sterling's weakness is helping to cushion the UK economy following the Brexit vote.

The strong export figures came despite nearly half of all manufacturing exporters claiming sterling's fall was actually having a negative impact on their business. Input costs – the amount businesses pay for raw materials or other goods and services – rose to a three-year high, and employment entered contraction territory for the first time since 2010, with bosses' saying staff counts will continue to fall over the coming months.

One-third of exporters said the pound's fall was, on balance, positive, while 19 per cent said the positives and negatives cancelled each other out.

Rain Newton-Smith, chief economist of the CBI said: "Manufacturers are optimistic about export prospects and export orders are growing, following the fall in sterling. However, the weaker pound is also feeding through to costs, which are rising briskly and may well spill over into higher consumer price sin the months ahead."

Read more: Exporters set for £20bn Brexit boost

Scott Bowman at Capital Economics added that the figures "suggests that the uncertainty created by the Brexit vote is weighing on the manufacturing sector but that the fall in the pound will help manufacturers deal with this uncertainty."