Sterling Overlooks Brighter Outlook For UK Manufacturers As May's Florence Speech Dominates

The UK industrial outlook is robust going into the fourth quarter but it doesn't matter much to traders after Theresa May's speech in Florence.

UK manufacturing output slowed during the three months to September, according to the latest CBI Industrial Trends survey, although activity is still well above its long run average and the outlook remains bright going into the fourth-quarter.

Total order books decreased slightly from the previous month in September, says the Confederation of British Industry survey of 429 UK manufacturers, with the slowdown seen across nine out of 17 sub-sectors. Stock levels, or inventories, were also considered to be above adequate levels during the month. However, the downturn is likely to be short-lived. 

“Respondents expect output growth to bounce back next quarter, broadly matching the robust pace seen in the three months to July and August,” the survey says, suggesting the September deceleration is only a temporary slowdown.

“Manufacturers continue to report solid growth in output, while total order books and export order books are holding firm,” says Anna Leach, CBI’s head of economic intelligence. “Expectations for selling prices were largely in-line with the previous month." 

Firms’ expectations for selling prices inflation remaining elevated is a possible symptom of the British Pound’s devaluation since the Brexit-referendum of June 2016.

"The survey has pointed to much stronger manufacturing growth than we have seen in the official data throughout the year to date," says Andrew Wishart, a UK economist at Capital Economics. "But given that the PMI survey is also consistent with a strengthening in manufacturing output growth, and that sharp sector-specific falls in output of transport equipment and pharmaceutical goods now look to be behind us, we remain optimistic that manufacturing output growth will accelerate over the second half of the year."

Nonetheless, Friday’s CBI data took a back seat in the wake of a key speech from Theresa May in Florence, Italy, which saw her offer to pay the European Union more than €20 billion, as part of a divorce settlement, in order to move negotiations onto the subject of the UK’s future relationship with the EU. The PM also set out her desire to secure a two-year transitional trading agreement with the EU after Britain leaves.

“Concessions from May on the “Exit bill” would probably kick-start stalled negotiations, allowing for progress to be made on the divorce settlement when the fourth round of Brexit negotiations begins on Monday 25th September,” says Finn McLaughlin, an economist at Capital Economics.

The UK is set to leave the EU on March 29, 2019, with or without a free trade agreement in place. Should the UK leave the EU without a deal ensuring a continuation of bilateral free trade, manufacturers in both Britain and Europe will be among the hardest hit by the failure of politicians on each side of the English channel.

“We are not sure this speech is going to provide much support for the pound at current levels,” says Derek Halpenny, European head of global markets research at MUFG. “Covering continued budgetary payments is certainly a start but what the EU is looking for is a more detailed proposal on how the UK envisages calculating its financial settlement.”

The Pound-to-Euro rate was quoted 0.42% lower at 1.1319 and the Pound-to-Dollar rate was marked down 0.16% at 1.3557 during morning trading in London.

Broadly speaking, Sterling has spent much of the London session on the back foot as traders remain alert to the risk of disappointment carried by May’s speech, as well as the prospect of her offer being rejected by Brussels. 

In addition, with the British PM offering substantial post-Brexit payments to Brussels and asking for a continuation of the status quo for a further two years, May's speech and the cabinet's approach has risked a rebellion among Brexiteers within her own party.