Oil-Price Plunge Helps Reverse U.K. Factory Slowdown: Economy

The drop in commodity prices over the past seven months may have come at just the right time for U.K. manufacturing, helping to revive its prospects for 2015.

Markit Economics said its Purchasing Managers’ Index rose to 53 in January, higher than economists had forecast. That indicates a reversal of fortune for an industry that saw growth progressively slow through 2014.

Manufacturing output rose just 0.1 percent in the last quarter of 2014, down from 1.1 percent quarterly growth at the start of the year. Now the decline in oil prices is lowering input costs, helping companies at a time of weak growth in the euro area, Britain’s biggest trading partner.

“Markedly weaker oil prices are easing the pressure on manufacturers’ margins and increasing their scope to price competitively,” said IHS Chief Economist Howard Archer. “The prospects for business investment still look relatively decent over the coming months which would support demand for capital goods.”

The manufacturing PMI rose in January after dipping to 52.7 in December from 53.4 a month earlier. Economists had forecast an increase to 52.7 last month from an initially reported 52.5.

The pound strengthened after the report was published before paring its advance. It was at $1.5035 as of 11:15 a.m. London time, down 0.2 percent from Friday.

Deflationary Impact

Markit said “solid output growth” at both intermediate and investment goods producers was driven by a buoyant domestic market and a “modest increase” in new business from France, Germany and the U.S.

It will publish its indexes for construction on Tuesday and for services, the biggest part of the economy, on Wednesday. The services measure is forecast to rise to 56.3 from 55.8.

A day later, the Bank of England’s Monetary Policy Committee will probably keep the key interest rate at a record low 0.5 percent, according to a Bloomberg News survey. Economists have pushed back their estimates for the first increase to late 2015, while traders have pushed out bets to well into 2016.

U.K. inflation slowed to 0.5 percent in December, matching a record low, and BOE Governor Mark Carney said the rate could drop below zero.

“Waning inflationary pressures will provide the Bank of England with leeway to push back the first rate increase to late-2015 at the earliest,” said Rob Dobson, a senior economist at Markit. U.K. manufacturers reduced their selling prices for only the second time during the past five years, he said.

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