Pound Rattled as UK Manufacturing Records First Decline Since 2013, But Improvements Forecast by One Commentator


Manufacturing data undermines Pound's recovery

The pound has fallen against the euro but maintains recent strength elsewhere  as the first data release of May is unequivocally negative.

Pound sterling has declined against the euro on news that the UK’s manufacturing sector continues to lose steam.

The CIPS and Markit have released their UK Manufacturing PMI data for April and the outcome of 49.2 confirms the sector is now in decline.

The reading comes in well below economist forecasts for a reading of 51 and confirms a fall below the critical ‘no-change’ level at 50.

PMI undermines the pound sterling

According to Markit and the CIPS the headline index was dragged lower by lacklustre trends in production and new orders and declines in both employment and stocks of purchases.

Purchasing Managers’ Index (PMI) surveys are the most closely-watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends.

Companies generally attributed the deterioration in operating conditions to a combination of softer growth of domestic demand and a reduction in new
business from overseas.

There were also a few reports that uncertainties regarding the oil & gas industry, retail sector and the upcoming EU referendum had led some clients to delay spending.

The weaker British pound appears to have failed to stimulate export demand as new export orders fell for the fourth straight month in April, albeit only marginally, as global economic growth continued to slow.

“In a month that saw the collapse of BHS, the troubles in the British High Street are being felt just as keenly in Britain’s factories. Manufacturers are compensating for stalling new order growth by depleting their stocks, and dramatically cutting the amount of raw materials they buy from suppliers,” says David Noble, Group Chief Executive Officer at the CIPS.

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Those hoping for an interest rate rise at the Bank of England in 2016 will be rethinking as trends in employment in the manufacturing sector appear to suggest upside wage pressures are fading.

The Bank of England will likely only raise interest rates in response to rising wage inflation.

“Manufacturing jobs are under pressure, with the sharpest overall decline in employment since February 2013. The sector is nervously waiting to see whether this is a temporary blip or the beginning of a more pervasive slow down,” says Noble.

Media commentators have predictably jumped on the mention of the EU referendum, but Paul Hollingsworth at Capital Economics cautions against attributing too much of the uncertainty surrounding UK manufacturing to the EU referendum.

“After all, last week’s CBI industrial trends survey showed a pick-up in investment intentions. Instead it probably reflects sterling’s past appreciation and weak overseas demand to a greater extent,” says Hollingsworth.

Looking ahead, the fall in the pound since around mid-November should help in time, and Capital Economics are upbeat about the prospects for the global economy.

“Accordingly, we continue to think that things will improve for UK manufacturers later this year,” says Hollingsworth.

The British Pound: Can the Recovery Extend?

The recovery seen by sterling, in place for much of the previous month, appears to remain in place, particularly against the US dollar which remains pressured across the board.

The euro is however making fresh advances and it is in the GBP/EUR we are more concerned.

While the latest technical forecasts on the currency pair appear to favour further sterling strength we would argue that strong data is absolutely critical if the sterling bulls are to remain in charge.

The outcome of Thursday's Services PMI are therefore absolutely crucial as the services sector accounts for more than 80% of UK economic activity.