Weak Pound Drives U.K. Factories Back From Brexit Shock

U.K. Manufacturing PMI Rises to 53.3 for August
  • Manufacturing gauge jumped by record in August to 53.3
  • BOE unlikely to cut rates again this year, economists say

U.K. factory activity reached a 10-month high in August as a weaker pound boosted exports, underscoring early evidence of British economic resilience after the Brexit vote.

IHS Markit said its Purchasing Managers Index, which dropped below the key 50 level in July, jumped by a record to 53.3. That was far better than economists had forecast; the median estimate in a Bloomberg survey was for a reading of 49. New orders rose, with sterling’s recent drop “by far the main factor” for the improvement in exports, Markit said.

“Companies reported that work that had been postponed during July had now been restarted, as manufacturers and their clients started to regain a sense of returning to business as usual,” said Rob Dobson, senior economist at Markit.

The figures are the latest to signal economic fortitude in the wake of the June 23 vote to leave the European Union, a decision that prompted the Bank of England to cut interest rates for the first time since 2009. The labor market, consumer confidence, retail sales and house prices have all shown strength over the summer months, confounding predictions of a slowdown by some economists. 

Twitter: Markit Economics on Twitter

That’s prompted investors to lower the odds on another rate cut by the BOE’s December meeting. They now see a 27 percent chance that the Monetary Policy Committee will lower the benchmark from 0.25 percent, down from almost 40 percent following the August decision.

‘Sharp Rebound’

“If the sharp rebound in the manufacturing PMI is mirrored in the services PMI, which covers more than half of the U.K. economy, chances are that the MPC would not cut bank rate in November,” Citigroup Inc. economists including Christian Schulz and Guillaume Menuet wrote in a note to clients.

Markit is due to report on construction activity Friday and publish its index of services next week.

Twitter: Markit Economics on Twitter

The pound advanced after the factory report was published to reach $1.3249 at 11:13 a.m. London time, up 0.8 percent on the day. It has fallen more than 10 percent against the dollar since the Brexit vote.

The referendum result initially sent measures of confidence and activity plunging, prompting the injection of new stimulus by the BOE. While the threat of a recession has receded, uncertainty over how the U.K. will actually exit the EU remains an issue.

Surprisingly Strong

“We knew it was going to be a bounce, but I wasn’t expecting it to be as strong as this bounce,” Jonathan Bell, chief investment officer at Stanhope Capital Inc., said in an interview on Bloomberg Television’s “The Pulse” with Mark Barton. “There are indications of confidence there and the concerns about the U.K. going into recession in the fourth quarter are maybe being allayed a bit.”

The data also add weight to the case for the BOE to refrain from adding to its newly extended stimulus measures. Governor Mark Carney announced in August that all elements could be taken further, including another rate cut. Policy makers are next set to meet on Sept. 15.

“Waiting would probably be advisable if you see these kind of numbers, because if you do things too quickly, you create uncertainty,” Virginie Maisonneuve, managing director of Maisonneuve Global Advisors, said in a television interview. “If the pound was dropping too quickly, you create uncertainty, which in turn could have an impact on the manufacturing sector.”

While spurring exports, the pound’s plunge is also fueling import costs and inflation, another factor for the BOE to consider. Markit’s measures of input prices and output charges both hit five-year highs in August.

“It is too early to say whether the rebounds in growth and inflation will be sustained,” Dobson said. “But the upturn in August suggests that the weaker exchange rate and recent policy action have helped to avert a downturn.”

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