Domestic Demand Offsets Exports to Keep U.K. Factories Afloat

  • Factory index rises to three-month high of 52.9 in January
  • Export orders fell the most since June on global weakness

An index of U.K. manufacturing unexpectedly rose in January as domestic demand offset the weakest export performance in seven months.

Markit Economics in London said on Monday its factory gauge climbed to a three-month high of 52.9 from a revised 52.1 in December, with a reading above 50 indicating expansion. Economists had forecast a decline to 51.6 from a previously reported 51.9. A measure of output climbed to a 19-month high.

The figures suggest British factories began the year on a reasonable footing against a weakening global backdrop. Bank of England officials are forecast to hold their key interest rate at a record-low on Thursday in the absence of upward pressures on costs.

“The U.K. manufacturing sector registered an uptick in its rate of expansion at the start of 2016, shrugging off a number of potential headwinds,” said Rob Dobson, an economist at Markit. “Subdued growth, rising global headwinds and a lack of inflationary pressure provide further cause for the BOE to push its first rate increase into the back and beyond of 2016.”

The pound has risen on a trade-weighted basis since 2013, though it’s weakened somewhat in recent months. It was trading at $1.4288 versus the dollar as of 11:39 a.m. London time, up 0.3 percent on the day.

Markit’s survey showed export orders fell in January by the most since June as sterling strength and weakening overseas markets damped demand.

“A number of manufacturers are still finding that the strength of the pound against the euro is impacting order inflows,” Dobson said. “Companies also highlight how the general operating environment has become increasingly competitive both at home and abroad.”

Output prices fell for a fifth month as cheaper oil and commodities drove down input prices. Manufacturers also reduced headcount at the fastest pace in almost three years.

“This all suggests that the manufacturing sector should add very little to inflationary pressure or to employment growth in coming months,” said Scott Bowman, an economist at Capital Economics Ltd. in London. “With headwinds to the sector remaining, any near-term improvement is likely to be moderate.”

Manufacturing contributed nothing to the economy’s 0.5 percent expansion in the fourth quarter, which was driven entirely by the dominant services industry.

BOE Governor Mark Carney said last week that the benchmark rate should stay at 0.5 percent until above-trend growth returns and wages and unit-labor costs pick up.

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