Pound drop boosts UK manufacturing, pushes up factories' costs

[LONDON] UK manufacturing grew at the fastest pace in 2 1/2 years in December, helped by the pound's depreciation since the vote to leave the European Union.

After dipping sharply in the wake of the Brexit referendum - dropping below the key 50 level in July - the IHS Markit Purchasing Managers Index has since recovered strongly and was at 56.1 last month. That's up from 53.6 in November and marks the highest reading since June 2014. A measure of new orders also rose.

"The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround," said Rob Dobson, an economist at Markit in London. He added that expansion appeared more balanced, with the survey suggesting improved capital spending and corporate demand.

While sterling's 18 per cent decline since the EU vote in June is helping competitiveness, it's also fueling inflation. Markit's survey showed that both costs and output prices rose for an eighth month, with 75 per cent of companies mentioning the exchange rate. Many also cited higher prices for commodities including oil and steel.

While the rates of inflation slowed last month, they remain "among the fastest seen during the survey history," according to Markit.

The recent change in the outlook for UK price growth has prompted a shift among Bank of England policy makers to a neutral from an easing stance. With consumer-price inflation set to exceed their 2 per cent target within months, they've said they have a limited tolerance of an overshoot. The median forecast of economists in a Bloomberg survey is that the BOE's key interest rate will stay on hold through 2017.

Another reason for the change in tone is the strength of the economy. While the BOE predicts softer growth this year, it revised its outlook late last year and said the slowdown won't be as sharp as previously anticipated.

Markit said its survey signals quarterly manufacturing growth of almost 1.5 per cent. That's a "surprisingly robust pace given the lacklustre start to the year and the uncertainty surrounding the EU referendum," it said.

BLOOMBERG