Weaker Pound Continues to Boost UK Manufacturing

The post-referendum weakness in Pound Sterling continues to aid the UK's manufacturing sector with a new report showing order books swelled this summer.

The Consortium of British Industry (CBI) say their latest Industrial Trends survey shows a fall in the value of Sterling has made UK exports more price-competitive, helping increase export orders.

The CBI ‘Industrial Trends’ report published August 22, shows a rise in the number of survey respondents who expressed optimism, especially in relation to Export Orders in August.

The results reflect the balance of positive versus negative responses from respondents working in the manufacturing sector, and showed a balance of +11 in affirmative responses, versus the +2 of the previous month – a substantial increase.

Total Orders (i.e. both to export and for the domestic market) rose more timidly to +13 from +10, however, it beat market consensus expectations of a fall to +9.

The data is second-tier in terms of importance for shifting direction in Sterling. The Pound fell after the release of the data, from 1.0924 versus the Euro before to 1.0910 in the hour which followed. 

GBP/USD meanwhile came down from 1.2840 to 1.2824 in the hour after the release.  In both instances the currency is taking direction from global drivers.

Capital Economics’ Andrew Wishart says, “August’s CBI Industrial Trends Survey continued to suggest that the manufacturing sector is benefitting from the depreciation of the pound.”

The economist went on to say that not only had sentiment improved in regard to Manufacturing’s current situation but also in the forward-looking component:

“Moreover, the forward-looking output expectations balance also rose slightly, suggesting that manufacturers expect this strength to continue in the near term. Overall, the survey remains consistent with a sharp acceleration in annual manufacturing growth from -0.6% in Q2 to over 1% in Q3.”

Another highlight of the survey were the responses to questions about factory goods’ inflation, which suggested a sharp rise taking place.

The balance of respondents saying manufactured goods had risen  in price was +19 in August versus the +9 of the month before, which compared very favourably to the long run average of only +2.

This prompted Anna Leach, the CBI’s head of Economic Intelligence to comment:

“After a brief pause last month, expectations for selling prices have rebounded, indicating that the squeeze on consumers is set to persist.”

She further added that the CBI, “expect CPI (Consumer Price Index) to top out at around 3% towards the end of this year and remain close to that level during 2018, as the effect of the weak pound continues to feed through.”

The current inflation rate is around 2.6% as measured in July.

Although the survey seemed to point to improved growth in the future, Capital Economics’ Wishart was quick to point out that the survey had not been particularly reliable at indicating forward activity in the past.

“Admittedly, the survey has proved a poor guide to the official figures recently. However, we remain optimistic that some improvement in the manufacturing sectors’ performance is in prospect for the second half of this year,” he said.

Exports had been expected to help offset the negative impact of Brexit uncertainty on the economy, and although they have risen since the referendum they have not improved the trade balance, since imports have risen just as strongly.

In a recent more in-depth report, Capital Economics' Scott Bowman noted how the rise in imports was due to strong continued household spending and consumption on foreign imports, despite the lack of upside in wages, and further headwinds from real-wage-erosion due to rising inflation.

Nevertheless, they saw consumer’s lust for imports as unsustainable and therefore it is possible the CBI survey may point to an emerging trade surplus, given it is a positive forward indicator for exports, and that imports are likely to decline.

An increasing trade surplus would help the Pound to strengthen, all other things being equal, as it shows a greater balance of demand for the currency, and this may indicate that the weakeness which followed the report's release was a knee-jerk reaction which may be undone in time after the market has considered the deeper implications of the data.