Pound jumps as UK manufacturing increases

Interest rates will stay low for longer - but household debt is a worry, says BoE

Britain’s manufacturers bounced back in October, as a rise in new orders and “surging growth” at larger companies pushed up activity at one of the fastest rates on record.

The pound jumped by half a cent against the euro and dollar on Monday after Markit’s closely-watched survey of the sector showed output climbed last month to its highest since June 2014, suggesting the sector could soon emerge from its third recession in a decade, reports The Telegraph.

The Markit/CIPS manufacturing PMI jumped to 55.5 in October, from an upwardly revised reading of 51.8 in September. This is above the 50 level that divides growth from contraction and much higher than economists’ expectations for a slight dip to 51.3.

Markit also said the 3.7 point rise in the PMI level was “one of the steepest registered” since the survey began 24 years ago.

Domestic demand continued to drive the expansion in the sector, although Markit reported consecutive increases in new export business for the first time since the final quarter of 2014, with rising demand from the Middle East, East Asia and the US.

Rob Dobson, senior economist at Markit, said October’s reading was consistent with quarterly output growth of 1 per cent.

“The revival provides a tentative suggestion that the manufacturers are pulling out of their recent funk, having been dogged by recession since the start of the year, and may help boost economic growth in the fourth quarter,” he said.

The surprise rise in output prompted traders to bring forward their bets of a UK interest rate rise. Markets now believe there is more than 50 per cent chance of a Bank of England rate hike by April 2016, while a rise is fully priced in for next November.

Last month, rates were not expected to rise from a record low of 0.5 per cent until well into 2017.

However, while growth in output and new business was “broad based”, Markit noted that “strong and surging growth” at bigger companies contrasted with a more “subdued expansion” among small and medium-sized businesses.

Markit said manufacturers created jobs for a thirtieth straight month, after revised data showed reports in October that employers has started to shed workers were premature.

The rise was again led by large-scale producers, as smaller factories saw little change in employment since September.

Analysts described October’s rise as “impressive” but said it was likely that some of the rise in overall output last month was “erratic”. Most expect activity to moderate in the final months of the year.

“Given that the factors which have undermined manufacturers this year, namely a strong pound and soft overseas demand, remain prominent, we continue to be cautious about the degree to which manufacturing will recover,” said Martin Beck, senior economic adviser to the EY ITEM Club.