Pound Lifted After September Manufacturing Data Shows UK Economy Regaining Lost Momentum

Friday’s solid industrial production number confirms the UK economy regained some lost momentum in the third-quarter, but will do little to lift the preliminary estimate of GDP.

The Pound was volatile during early trading Friday after September’s industrial production data showed British manufacturing activity surging toward the end of the third-quarter.

Overall industrial production rose by 0.7% during the September month, up from the 0.2% growth seen in August and far ahead of the consensus forecast for growth of 0.3%, according to Office for National Statistics data. 

Manufacturing production, the largest component of industrial production, rose at a rate of 0.7% during the month. This was also far ahead of the economist consensus forecast for growth of just 0.3%.

"The flurry of activity data suggests that the industrial sector is helping to provide some offset to the consumer slowdown," says Ruth Gregory, a UK economist at Capital Economics. "This confirmed that the sector added 0.2pp to GDP growth in Q3 relative to Q2." 

Economists were watching the data closely as a 0.3% rise in industrial production is all that was required to more or less confirm the Office for National Statistics earlier estimate of third quarter GDP growth.

October data showed the UK economy growing at a rate of 0.4% in the third quarter, up from the 0.3% growth seen in the second and twice the 0.2% growth rate of the first quarter 2017.

"Nonetheless, the 1.6% monthly fall in construction output in September was larger than the 1.0% drop the ONS had initially pencilled in," Gregory adds. 

On the downside, construction output contracted -1.6% in September, deepening a slowdown that took hold earlier during the year. The industry is now mired in a technical recession following two back to back quarters of negative growth.

The construction industry has been hit by a downturn in the commercial construction segment of late as a slowdown in new commercial orders has seen the industry failing to replace completed projects with new work.

Britain’s housing market has remained a bright spot for the industry, although continued growth has not been sufficient enough to offset downward pressures from the slowdown on the commercial side.

Sterling rose sharply against the Euro and Dollar in the moments after the release before paring gains and then trading lower against the Euro. The Pound held gains over the Dollar.

The Pound was quoted 0.04% lower against the Euro, making for a Pound-to-Euro rate of 1.1274. The Pound-to-Dollar rate was marked 0.07% higher at 1.3149.

"Taken together then, the figures will have minimal impact on the overall GDP numbers for Q3," Gregory says, of the morning's manufacturing and construction data.

The data comes at the tail end of another two day round of Brexit negotiations and the conclusion of a week where the backdrop in London was again marred by uncertainty over the stability of the British government.

Markets are waiting to see whether the British government will concede to European Union demands for a larger “Brexit Bill” in the hope that progressing talks onto the subjects of trade and transition will bring Britain closer to the "Brexit deal" Prime Minister Theresa May has been pursuing. 

This comes against a backdrop of increased uncertainty over the stability of the government, with the Prime Minister having lost two cabinet ministers within the space of a week.

Britain’s former defence minister resigned due to allegations relating to a sexual harassment scandal while the international development minister quit after it emerged she made unauthorised diplomatic visits to Israel.

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