UK Manufacturing and Trade Data Offers Mixed Signals for Sterling

July manufacturing and trade deficit figures did little to shift the clouds gathering over the UK economy.

The Pound whipsawed Friday as traders reacted to Office for National Statistics data that probably did little to shift the clouds gathering over the UK economy.

Activity in the manufacturing sector gathered pace at the beginning of the current quarter, according to output figures released this morning, while the trade deficit narrowed faster than was expected.

But export growth has slowed, despite the post-referendum fall in Sterling, casting doubts over whether trade can pick up the slack created by a consumer that has recently begun to pare back spending. As we note here, it is actually the persistent trade deficit being experienced by the UK that leaves the GBP/EUR exchange rate at risk of sliding to parity.

Manufacturing production increased at a month on month pace of 0.5% during the three months to the end of July, against economist forecasts for growth of 0.2%, marking its fastest pace of expansion for the year to date.

“In July 2017, total production was estimated to have increased by 0.2% compared with June 2017, due mainly to a rise of 0.5% in manufacturing; the largest contribution to the rise came from transport equipment, which rose by 7.6%,” says the ONS.

This is while, during the three months to the end of July, the largest contribution to overall output growth came from increased activity in the oil and gas sector - thought to be the result of reduced maintenance activity in the current year.

“Today’s flurry of activity data suggests that the industrial and construction sectors are still providing little offset to the consumer slowdown,” says Ruth Gregory, an economist at Capital Economics. “Meanwhile, the trade figures were fairly disappointing.”

The Pound-to-US-Dollar exchange rate rose by around 15 points, to trade at 1.3148 before paring gains and turning lower, while the Pound-to-Euro exchange rate also slid 20 points lower to 1.0881 after a brief bounce.

Separately, other data showed the UK’s trade deficit with the rest of the world narrowing from £-12.7 billion in June, to -£11.57 billion in the three months to the end of July, while economists had forecast a more modest fall to £11.9 billion.

However, July’s goods and services deficit was largely unchanged while export growth slowed further during the month, taking a shine off of the figures.

“Looking ahead, though, given that the consumer slowdown should weigh on import volumes and the surveys are pointing to a further improvement in export growth, we still think that net trade should provide more support to GDP ahead,” says Gregory.

Signals coming from the UK economy have been mixed of late, with the IHS Markit manufacturing PMI showing a sharp improvement in industry conditions for the month of August, while similar surveys of the construction and services industries pointed to a notable slowdown.

There is consensus that UK economic growth remained moribund in the third quarter while continued weakness of the pound relative to some of its G10 counterparts has placed renewed upward pressure on prices.

The Bank of England will announce its latest policy decision on Thursday, September 14, amid a growing debate over whether current conditions will mean it eventually has to cut rates again, or whether it prioritises heading off inflation with a rate hike.

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