Pro-Brexit MPs welcome strong factory data

Posted on September 1, 2016

Shipping containers sit on the dockside at London Gateway port, operated by DP World Ltd, in this aerial photograph taken over Stanford-le-Hope, U.K., on Wednesday, July 22, 2015. British manufacturers are struggling to build exports because of the unfavorable exchange rate and uncertainty in the euro area, the Confederation for British Industry said. Photographer: Chris Ratcliffe/Bloomberg©Bloomberg

Eurosceptic MPs pointed to buoyant new manufacturing data as more evidence the Treasury had been “scaremongering” before June’s EU referendum, when it predicted a vote to leave the EU would trigger a recession.

The figures showed activity in Britain’s factories hit a 10-month high in August, the latest sign that the economy may have recovered its poise after the initial shock of the Brexit vote.

    Jacob Rees-Mogg, a Conservative member of the Commons Treasury committee, said the Treasury had been proved wrong and accused the Bank of England of being “too early to act” in cutting interest rates in August to 0.25 per cent.

    “I think a number of people wanted to believe their own propaganda in the Brexit campaign.” Mr Rees-Mogg said. “The economy has turned out to be more robust.”

    However, Philip Hammond, the chancellor, told colleagues it was “too early” to say whether the economy had emerged in good shape after the Brexit vote.

    Mr Hammond will wait for more data in the next two months before deciding what remedial action — if any — he needs to take in his Autumn Statement to address the economic and fiscal fallout of the Brexit decision.

    Treasury officials said the chancellor would examine further evidence, including next week’s data on Britain’s services sector and October’s growth figures, before forming a view on the health of the economy.

    “It is too early to tell where things are,” said one official close to the chancellor. “Some data are more positive than people thought, but these are early days and we will get more hard data later in the autumn.”

    Barclays analysts say business nerves have been settled by the speedy formation of a new government under Theresa May; the BoE’s decision to cut rates; and a signal Mr Hammond will use his Autumn Statement to ease austerity.

    Nonetheless, the strong results in the monthly survey of purchasing managers reinforces the impression that after the initial shock of the UK’s vote to leave the EU, day-to-day economic activity is carrying on much as before.

    Lee Hopley, chief economist at industry organisation EEF, said manufacturers “appear to have their mojo back”.

    The weakening of the pound since the Brexit vote has helped manufacturers, but sterling jumped on the data, briefly breaching the $1.33 mark before ending the day in London up 1 per cent.

    Rob Dobson, senior economist at Markit, which publishes the purchasing managers’ index (PMI) survey, said companies reported that work postponed during July had been restarted after manufacturers and clients “started to regain a sense of returning to business as usual”.

    In the aftermath of the vote, manufacturing PMI fell to levels normally associated with contraction.

    Martin Weale, who stepped down from the BoE’s Monetary Policy Committee during the summer, told the FT in July the weakness in the PMI surveys — which had signalled business activity dropping to its lowest level since spring 2009 — was one of the clinching factors in his decision to back a stimulus package.

    But August’s survey showed a marked recovery, with the overall result rising to 53.3, from 48.3 in July. This was the joint-highest month-on-month increase in the survey’s near 25-year history, and far outstripped expectations.

    Simon Wells, chief UK economist at HSBC, said the results suggested that the large drop in July had been a “knee-jerk reaction”.

    Paul Hollingsworth, economist at consultancy Capital Economics, warned that the August figures might be overstating the improvement in conditions, in the same way the July survey overstated the deterioration. But he also suggested the economy was getting over the shock of the Brexit vote and that the manufacturing survey was “another reason to think that the economy is set for a period of slower growth, rather than a full-blown recession”.

    Consumer spending has held up and companies reported a recovery in domestic orders from July, though they were not back to pre-referendum levels.

    Export orders also rose, which most survey respondents attributed to weaker sterling.

    However, there was also evidence of the downsides of the weaker pound: both input and output price inflation rose to a five-year high.

    Mr Dobson added that the latest data suggested weaker sterling and the BoE’s recent decision to cut interest rates had “helped to avert a downturn”.

    Manufacturing accounts for about 10 per cent of the UK economy, so economists and policymakers will have a close eye on the PMI results for the dominant service sector, which will be published on Monday.

    George Buckley, chief UK economist of Deutsche Bank, said if there was a similar recovery in the services PMI that would suggest growth was on track to be stronger than many city forecasts.

    But he added it was early days, and “uncertainty surrounding access to the single market should dampen GDP relative to the pre-Brexit case”.

    Retail spending was strong in July but many businesses have put longer term investment plans on hold until they know more about how Britain will leave the EU.

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