UK manufacturing strengthens, cost pressures intensify

[LONDON] UK manufacturing conditions improved this quarter with both output and orders growing for the first time in more than a year, according to industry group EEF.

Its measure of output at factories rose above zero, marking the first positive overall balance since the second quarter of 2015. That's set to continue next quarter as the benefit of the pound's 15 per cent drop since the vote to leave the European Union helps foreign demand, the organization said. It also reported an improvement in business and economic conditions.

After surveys and confidence indicators dropped sharply after the Brexit vote in June, most data since have shown the UK economy performing strongly. Bank of England Chief Economist Andy Haldane acknowledged the better outlook in comments on Friday, while Governor Mark Carney may give his perspective when he delivers a speech in Liverpool later on Monday.

The downside of the pound's decline is also becoming apparent, with import prices beginning to rise sharply. The EEF said Monday that its research "confirms that inflationary pressures are building and while confidence has picked up, it's far from soaring." A separate report from consultancy EY showed that while the geographical rebalancing of the British economy away from the south is possible, it's "still more of a promise than a reality" and will require effort from the government to promote more evenly-distributed growth.

That was a topic also covered by Haldane on Friday, who highlighted regional disparities in everything from productivity to income to education and said this was a problem best tackled by government policy.

The UK is seeking to realign the economy both away from the dominant services sector and from the south in the wake of the Brexit vote. Prime Minister Theresa May has set out an Industrial Strategy targeting technologies like robotics and artificial intelligence, industrial biotechnology, and advanced materials manufacturing. The government is preparing to publish its the full strategy in coming weeks.

"Little progress is likely to be made on economic rebalancing over the next three years," said Mark Gregory, EY's chief economist. "In a slower-growing economy, closing the gap will become even harder."

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