So much for that export-led recovery, it seems! UK manufacturing shrank to 45.4 last month according to the Markit PMI survey released today, meaning the sector shrank at its fastest pace since May 2009. It was forecast for a more modest decline to 48.5 (figures beneath 50.0 indicate contraction.)
On the one hand, this puts paid to George Osborne’s vision of a “march of the makers,” where Britain’s manufacturers export us back to recovery. On the other hand, it’s also been a blow to the gut to the pound today, which has fallen more than half a cent across the board.
So what was responsible for this manufacturing decline, and can the pound make it up?
Well, it seems the chief cause of the slowdown was a decline in global confidence. As Jens Larsen of RBC notes: “This is the most internationally exposed part of the UK economy,” meaning it’s most dependent on activity elsewhere. Hence, as the Eurozone slows, and even emerging powers such as China feel the pinch, the UK is inevitably drawn in.
And can the pound bounce back? That depends on large part on both how the recovery performs from here on out, and what steps policy makers take to meet the challenge. Lee Hopley, chief economist at EEF, for instance comments: “The Government will need to return from recess with a lot more clarity around its plans to get growth back on track.”
Yet, with the Coalition dedicated to cutting UK debt, its scope for activity will be limited. Instead, we’re arguably better off pinning our hopes on the Bank of England intervening to boost the economy, and sending the pound higher in the process.
Though the central bank launched QE4 last week, as well as its Funding for Lending scheme just this morning, both these steps were taken before this latest manufacturing data, as well as recent reports the UK contracted –0.7% in Q2. Given that, we might well expect the BoE to ramp up its efforts, if not this month then the next. That could be the lift the pound needs.
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