UK Manufacturing Eases Further in February Amid Signs Export Boost is Waning

© freepeoplea, Adobe Stock

UK manufacturing data comes ahead of surveys of the construction and services sectors and a key Brexit-related speech from Prime Minister Theresa May Friday. All are important for the Pound.

Pound Sterling slipped a touch during early trading Thursday, following steep declines in the previous session, as markets responded to a mixed UK manufacturing report for February.

February’s IHS Markit manufacturing index fell to 55.2 for the recent month, down from 55.3 previously, when economists had expected a larger decline to 55.1.

It was the first item of significance on the UK economic calendar for the new month and delivered a modest beat against market expectations. But the plot thickens beneath the headline numbers.

The survey measures changes in business conditions across the manufacturing industry. It asks respondents to rate current conditions across a range of areas including employment, production, new orders, prices, supplier deliveries and inventories.

IHS Markit says the fall resulted from a slowdown in production across the “consumer, intermediate and investment goods sectors” but that this was partly offset by a rise in new orders. Order book growth was supported by strengthening domestic demand and continued, but slower, growth of new export business.

The Pound was quoted 0.12% lower at 1.3737 against the US Dollar a short time after the release, deepening an earlier -0.01% loss, while the Pound-to-Euro rate was 0.08% lower at 1.1272 after also extending an earlier fall by a fraction.

The February report marks the third consecutive month of declines for the index. These falls follow the longest run of gains for the industry since the 1980’s, as manufacturers were buoyed in the post-referendum months by a cheaper pound and more recently, a pickup in global growth.

"February’s manufacturing PMI suggests that the sector has lost some momentum in Q1," says Paul Hollingsworth, a senior UK econonist at Capital Economics. "What’s more, there were signs that the boost to exports from the drop in the pound is fading too, with the export orders balance falling on the month."

Thursday’s data comes ahead of similar surveys of the construction and services sectors, known as “the PMIs”, all of which pointed to a modest slowdown in the UK’s three largest economic sectors during January. A key Brexit-related speech by Prime Minister Theresa May, due on Friday, will also be important for the Pound.

"The EU’s draft ‘Withdrawal Agreement’ knocked the pound sharply lower – as investors reassessed the probability of a near-term Brexit transition deal being agreed," says Viraj Patel, an FX strategist at ING Group.

"History suggests that under such episodes, GBP has the propensity to correct more sharply if we get any good news. We’ll need a catalyst, but risk-reward favours not chasing Brexit sentiment driven moves lower in GBP. Look for consolidation in GBP ahead of PM May’s speech." 

Thursday's data also comes after a flurry of other gloomy news for the UK, the economy and its currency. Nationwide Building Society data released overnight showed UK house prices falling 0.3% in February, following a brief and surprise pickup in January.

“Month-to-month changes can be volatile, but the slowdown is consistent with signs of softening in the household sector in recent months,” Robert Gardner, chief economist at Nationwide, wrote in a note accompanying the figures.

The mortgage data followed an Office for National Statistics report released last week, showing the UK economy grew slower than was previously thought during the final quarter of 2017.

ONS says UK economic growth was in fact 0.4% during the final quarter, not the 0.5% previously suggested by the ONS, dealing a blow to observers who had cheered a last minute lift in UK economic momentum during 2017.

The annual pace of growth was also downwardly revised, from 1.8% to 1.7%, with the revised number marking a fall from the 1.9% growth seen back in 2016.

That was the result of downward revisions to industrial production figures, due to the closure of a key oil pipeline in the North Sea, and business investment having ground to a standstill.

This data came closely on the heels of the fourth quarter labour market report, which showed the unemployment rate rising for the first time since July 2015. The ONS attributed this to a rise in the participation rate rather than an increase in job losses.

All of this matters for the Pound because it could impact on the Bank of England and its thinking about whether the UK will be able to sustain another rise in interest rates. It hiked the base rate by 25 basis points already, to 0.50%, in November.

For what it’s worth, the fourth quarter growth performance was in line with the BoE’s forecasts and it’s well known now the bank’s primary concern is inflation, which sits stubbornly at 3%.

So far, the bank says it’s taken heart from the broad fall in unemployment over recent years, which is now beginning to push wages higher, and because of this it is less willing to play it cautious by holding back on interest rate rises.

Nonetheless, a further deterioration in UK economic conditions, particularly around unemployment and Brexit, may change this.

Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.

Google ad

Advertisement Data Slot Mobile

350 250 banner