UK manufacturing booms on sterling weakness - ING

James Knightley, Senior Economist at ING, notes that the UK manufacturing activity is at a two and a half year high, boosted by sterling weakness but this means higher costs and higher inflation, which will squeezes household spending power.

Key Quotes

“The UK manufacturing PMI for December has jumped to 56.1 from 53.6, well above the consensus forecast of 53.3. This is the strongest figure since June 2014 and again suggests that the Brexit referendum has not harmed the UK’s manufacturing sector. In fact, the 18% post referendum plunge in the value of the pound against other major currencies has boosted the UK’s competitiveness on the international stage. This is being seen in the new orders component with export orders performing well.”

“However, sterling’s fall also means that imported components are more expensive with both costs and output prices rising yet again. This increase in domestic pipeline inflation pressures is being mirrored by higher costs for imported consumer goods and energy. As such, the squeeze on household spending power is set to intensify. So while the strength of the manufacturing sector is good news, the likely weakness in the much larger consumer sector will more than offset it. Therefore we expect GDP growth to slow to a little above 1% in 2017 from 2.2% in 2016.”