UK factory order books strongest since 2015, but costs growing

[LONDON] British manufacturers are enjoying their strongest orders in nearly two years but their costs are rising sharply following last year's Brexit vote which pushed down the value of sterling, a survey showed on Wednesday.

In the latest sign of how Britain's economy has so far withstood the shock of June's vote to leave the European Union, the Confederation of British Industry's monthly industrial orders balance rose to +5 in January from zero in December.

That was its highest since April 2015. Economists polled by Reuters had expected a smaller rise to +2.

In a separate quarterly questionnaire, the CBI found manufacturers were planning more investment and the most optimism in nearly two years. That suggested little concern about the outlook for Britain's relationship with the EU, which buys nearly half its exports. "UK manufacturers are firing on all cylinders right now with domestic orders up and optimism rising at the fastest pace in two years," Rain Newton-Smith, the CBI's chief economist, said.

Since the Brexit vote, the pound has fallen 15.4 per cent against the dollar GBP-D4 and 10.5 per cent against the euro , making British exports cheaper but pushing higher the cost of imported inputs for factories.

The Bank of England is expected to raise its predictions for overall economic growth this year when it meets next week in what would be a second quarterly upgrade, a Reuters poll of economists showed earlier this week. "The weaker pound is driving export optimism for the year ahead, but is having a detrimental impact on costs for firms and ultimately for consumers," Newton-Smith said.

The CBI survey's reading of prices that manufacturers expect to charge in the next three months rose to +28 from +26, the highest level since June 2011.

The CBI found a measure of unit costs among manufacturers rose to its highest level since July 2011.

Samuel Tombs, an economist with Pantheon Macroeconomics, said he expected factory gate inflation would soon rise to about 6 per cent, more than double its most recent rate, with a knock-on effect for consumers later this year. "We doubt that order books will look as healthy as they do now after manufacturers have increased their prices sharply,"Mr Tombs said in a note to clients.

REUTERS