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U.K. Manufacturing PMI Slides as "Trade Tensions" and "Brexit Uncertainty" Hit New Orders and Employment

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- Manufacturers hit by "trade tensions", "Brexit uncertainty".

- New orders, employment decline and output growth slows.

- Economists say sector unlikely to add to GDP growth in Q4.

The U.K. manufacturing outlook darkened during October, according to the latest IHS Markit PMI survey, as "trade tensions" and "Brexit uncertainty" led to a decline in new orders and employment among the nation's industrial firms.

October's manufacturing PMI came in at 51.1, down from 53.6 in September and far below the market consensus for an index reading of 53.0.

Manufacturing output growth weakened during October while new orders and employment levels declined. Most of the decline in demand came from overseas, both inside and out of the European Union, although growth in domestic demand also slowed during the recent month.

"Foreign demand decreased for the second time in the past three months during October. Some companies reported that Brexit uncertainties had negatively impacted inflows of new work from within the EU. Others focussed more attention on rising global trade tensions and weaker demand from the world autos sector," IHS Markit says.

President Trump has imposed tariffs on $250 billion of China's annual exports to the U.S. and has threatened to target all of its $500 billion export goods trade with levies if the country's leadership does not abandon its "unfair" trade practices. This has slowed the Chinese economy and hurt manufacturers in the industrialised world. 

Weaker activity in the European automotive sector was also at play in October, according to IHS Markit. Europe's car manufacturing sector has been a weight around the ankles of most European economic figures of late, after new rules governing emissions testing procedures came into effect in September, leading to disruptions in production across the bloc but particularly in Germany. 

"Manufacturers are at the sharp end of the slowdown in global trade and the increasing reluctance of European customers to source components for Britain, given the risk that supply chains might fail in the event of a no-deal Brexit," says Samuel Tombs, chief U.K. economist at Pantheon Macroeconomics. "Fearing a protracted period of weakness, manufacturers also reduced headcounts, marginally, for the first time since the Brexit vote."

PMI surveys measure changes in industry activity by asking respondents to rate conditions for employment, production, new orders, prices, deliveries and inventories. A number above the 50.0 level indicates industry expansion while a number below is consistent with contraction.

Markets care about the data because it is an important indicator of momentum within the economy. And economic growth has direct bearing on the rate of inflation and it is consumer price pressures that dicate where interest rates, which are the raison d'être for most moves in exchange rates, will go next.

"The larger-than-expected fall in the manufacturing PMI, from 53.6 to 51.1 (consensus 53.0), left the balance at its lowest level since July 2016 immediately after the EU referendum, and confirmed that the sector made a weak start to Q4," says Andrew Wishart, an economist at Capital Economics. "And there was little encouragement in the forward looking balances of the survey either, as both the export and total new orders balances also fell." 

October's manufacturing data comes ahead of similar surveys of the construction and services industries, due to be released on Friday and Monday respectively.

It was also released on a morning when the Pound has been boosted by reports that officials are close to agreeing terms of the U.K.'s withdrawal from the European Union, and that negotiators have reached an agreement that will prevent the City of London from being shut out of European Union markets after Brexit.

Economists have said neither party can afford for financial services firms in London to be prevented from operating across the bloc.

Disagreement over how to manage the Northern Irish border in the event a trade deal is not agreed at a later date has been standing in the way of a withdrawal deal after Brussels rejected Prime Minister Theresa May's "Chequers plan" at a summit in the Austrian city of Salzburg in September.

The U.K. economy is on course to expand by around 1.3% for the 2018 year, a much lesser rate than the 1.7% seen in 2017, due to a steep weather-induced slowdown in the first quarter according to Office for Budget Responsibility (OBR) forecasts released Tuesday.

The OBR says the economy is likely to expand by 1.6% in 2019 but that growth will slow to just 1.4% in 2020 and 2021, before rebounding to 1.6% again by 2023.

Business investment growth remains lacklustre while international trade is assumed to make no contribution to growth over coming years given the OBR expects a reduction in "trade intensity" after Brexit day in March 2019.

However, household spending is set to grow in line an improved rate of wage growth, supporting to the economy alongside the public purse. And the labour market is seen going from strength to strength over the coming quarters, pushing the unemployment rate beneath 4%.

Despite forecasts of weakening growth, markets are anticipating that the Bank of England (BoE) will continue raising its interest rate over coming years, although the Governor Mark Carney and colleagues are seen waiting until after Brexit day in March 2019 before hiking again. 

The Bank of England has raised interest rates twice, taking bank rate to 0.75%, since November 2017 citing above-target inflation and the prospect of an inflationary pickup in U.K. wage growth over the coming year.  

 

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