U.K. Manufacturing Unexpectedly Cools as Pound Saps Exports

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Growth at U.K. factories unexpectedly cooled last month as the stronger pound hit demand for British goods abroad, adding to signs economic growth is losing momentum less than a week before the general election.

A Purchasing Managers’ Index for the manufacturing industry fell to a seven-month low of 51.9 from 54 in March, Markit Economics Ltd. said on Friday in London. Economists had forecast an increase to 54.6 from a previous reading of 54.4. New export orders shrank for the fifth time in seven months.

The pound has risen about 6 percent this year against the euro, the currency of Britain’s biggest trading partner, as the European Central Bank buys government bonds to stoke inflation. Data on Tuesday showed growth slowed in the first quarter, setting the scene for an election where no major party is set to win an outright majority.

The factory report “partly reflects increased business caution ahead of the highly uncertain general election,” said Howard Archer, an economist at IHS Global Insight in London. “If prolonged political uncertainty can be avoided, the outlook for manufacturers seems pretty healthy on the domestic demand front.”

Markit’s headline gauge has now held above 50, the dividing line between expansion and contraction, for just over two years. Its data showed employment at manufacturers increased for a second full year.

Weaker Pound

The factory PMI is one of the last economic reports before the election. The economy expanded just 0.3 percent in the first quarter, the weakest reading since 2012, as industrial production and construction both contracted.

Sterling weakened after the report, and stayed lower after a separate Bank of England report showed mortgage approvals fell in March. Business lending, including for small- and medium-sized enterprises, also declined.

The pound was down 0.4 percent on the day and traded at $1.5298 as of 10:52 a.m. London time. It was at 73.50 pence per euro versus 73.12 pence on Thursday.

“A slowing global economy and strong sterling-euro exchange rate are hurting the competitiveness of exporters,” said Rob Dobson, a senior economist at Markit in London. “A key challenge for the next government is to revive manufacturing and help it at least regain its pre-crisis peak.”

Though its index of new orders fell to 52.9, the lowest since September, the expansion was driven by domestic activity. A drop in output prices reflected weaker demand.

Price Decline

On the input side, prices declined in part due to the benefits of the weaker euro, Markit said. However, the pound’s slide against the dollar lifted the price of dollar-denominated imports. The pound has fallen 11 percent against the greenback since the middle of last year.

“Any sign that export growth was about to turn around at the end of last year now looks to have been a false dawn,” said Lee Hopley, chief economist at manufacturers’ lobby EEF. “Nevertheless, it would be premature to write off manufacturing’s contribution to growth in the future, not least because continued employment growth points to some confidence about longer term prospects.”

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