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Manufacturing Activity in Strong Bounce as Business 'Stock up' before Brexit

Manufacturing

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The UK manufacturing PMI for December read at above-consensus levels thanks to stronger inflows of new business and a solid increase in stocks of purchases.

According to IHS Markit, the UK manufacturing PMI read at 54.2, a six-month high, while consensus estimates were for a reading of 52.6. The number will defy expectations for a slump in activity for the sector amidst ongoing angst over Brexit and a global slowdown in manufacturing activity.

Indeed, this morning's Chinese PMI numbers showed the heavy-weight Chinese manufacturing sector contracted in December while Germany's manufacturing PMI out this morning came in a 51.3, just above the key 50 level.

What is notable is that the robust UK manufacturing activity appears to have been driven by export demand.

"Growth of new orders accelerated to a ten-month high in December. Inflows of new work strengthened from both domestic and export markets, with the latter benefiting from improved demand from the USA, Europe, China, India, Brazil and Africa," reports Markit.

However, the hand of Brexit cannot be avoided entirely:

According to Markit, manufacturers linked increases in both domestic and overseas demand to clients purchasing to build up safety stocks to mitigate potential Brexit disruption.

"Any boost to output from stockbuilding would be temporary. Even so, Brexit could actually provide some (temporary) support to activity at the start of 2019," says Andrew Wishart, UK Economist with Capital Economics.

Pantheon Macroeconomics PMI

Image courtesy of Pantheon Macroeconomics.

Nevertheless, there were some reports to Markit that new product launches and successful promotional activity had contributed to sales growth.

New export order wins were also supported by the ongoing weakness of the Sterling exchange rate which remains near historic lows against the Euro, Dollar and a host of other major currencies.

The response by Sterling to the PMI data was relatively muted with GBP/EUR and GBP/USD unchanged on the data as Sterling remains fixated on the outcome of the mid-January Brexit vote. Furthermore, makrets will likely consider the bump in manufacturing activity as something of a blip.

"Despite the headline index rising to a six-month high in December, the manufacturing PMI still suggests that the sector stagnated in Q4. Indeed, the output balance, which has the best relationship with the official measure of manufacturing output fell back a touch in December, leaving the average output balance in Q4 at 52.5, consistent with flat manufacturing output," says Wishart.

Samuel Tombs, Chief UK Economist with Pantheon Macroeconomics says any revival in manufacturing output in Q2, shortly after a no-deal Brexit likely will have been averted, "will be sluggish, because producers simply will run down stocks".

As a result, December's PMI doesn’t alter Pantheon's view that the manufacturing sector will struggle over the coming months and that GDP growth will be well below-trend in Q4 and Q1; they expect quarter-on-quarter growth of 0.2% and 0.3%, respectively.