UK manufacturers riding high on the sterling wave - ING

James Smith, Economist at ING, suggests that a weaker pound is still trumping a deteriorating growth outlook for UK’s manufacturers.

Key Quotes

“But we see downside risks to 2017 growth and think that the Bank of England will cut rates further.”

“The UK manufacturing PMI came in a touch weaker than expected, but still at a respectable 53.4. This is much higher than the immediate post-Brexit dip. But is this overstating underlying growth? Well, the weaker pound is certainly a welcome bonus for the outward-looking manufacturing sector. Of course, as Markit notes, the flip side is that input prices have surged, which will be a particular drag on firms who fit into a large global manufacturing chain.”

“However, we expect domestic demand to slow quite considerably next year as a) consumer spending gets hit by falling real wages and b) investment slows in response to post-Brexit uncertainty. We think this will prove to be more important for manufacturers and it is possible that we see the PMI deteriorate in 2017. Noise surrounding the Brexit negotiation process and expectations concerning the eventual EU-UK deal will also be a key driver of sentiment. We still think markets are underestimating the risks of further Bank of England easing next year – we expect a rate cut in May.”