Brexit latest: Manufacturing in surprise surge in August

The Purchasing Managers’ Index jumped to 53.3, helped by the slump in sterling in wake of referendum vote

Ben Chu
Economics Editor
Thursday 01 September 2016 12:10
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The 5-point jump was the joint greatest in the 25 year history of the survey
The 5-point jump was the joint greatest in the 25 year history of the survey

Manufacturing output unexpectedly surged in August according to the latest Purchasing Managers’ Index report from Markit/CIPS, helped by the post-Brexit vote collapse in sterling.

The index – where the 50 mark separates contraction from growth – jumped from 48.2 in July to 53.3 in August.

The monthly surge of 5 points was the joint greatest in the 25 year history of the survey, Markit said.

Export orders from the US, Europe, China and the Middle East rose strongly and the new orders index leapt from 47.8 to 54.6.

Markit reported that the depreciation of sterling since the June EU referendum was "by far the main factor" cited by manufacturers as supporting the surge in new export work.

Manufacturing rebounds in August

City of London analysts had expected a manufacturing PMI reading of just 49 for August and the postive news instantly sent sterling up more than a cent against the dollar to $1.3240.

Sterling lifted

Reuters Eikon

Against the euro the pound jumped 1 per cent to €1.1890.

The pound fell more than 10 per cent against the dollar and the euro in the wake of the vote, hitting its lowest level in 31 years against the US currency.

"It is too early to say whether the rebounds in growth and inflation will be sustained, but the upturn in August suggests that the weaker exchange rate and recent policy action have helped to avert a downturn,” said Rob Dobson of IHS Markit.

Manufacturing accounts for around 10 per cent of the UK economy and some analysts said the reading reduced the likelihood of a recession for the UK in the second half of the year.

"The latest survey evidence supports our view that the economy is set for a period of slower growth, rather than a full-blown recession in the near term," said Paul Hollingsworth of Capital Economics.

A collapse in the PMIs for the manufacturing sector and the dominant services sector immediately after the Brexit vote had pointed to an overall contraction of GDP in the third quarter, based on historic data relationships.

The readings were cited by the Bank of England as a justification for a cut in interest rates to a new record low of just 0.25 per cent in August.

But recent data from the Office for National Statistics has shown that consumer spending has held up well since the vote.

However, Lee Hopley of the EEF manufacturers' organisation sounded a note of caution about manufacturing.

“Today’s data provides a lot of relief that manufacturing activity is still on the up. But the heightened volatility in the indicator in the last couple of months still raises questions about whether sentiment has overshot somewhat and, rather than this pace of expansion being sustained, some moderation is likely in the coming months,” she said.

According to the latest GDP estimate from the ONS manufacturing output surged by 1.8 per cent in the second quarter of the year, the period directly before the referendum.

Today’s PMI also showed growing inflationary pressures in manufacturing with both input and output price inflation rising to a five year high, also driven by sterling’s falls.

Manufacturing employment rose for the first time this year, although modestly, according to the survey.

The August construction PMI report will be released tomorrow, with analysts expecting the building sector to remain in contraction.

The most important of the three monthly PMI survey – services – will be published on Monday.

Services account for 80 per cent of UK output and the sector is predominantly domestically focused

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