Manufacturing in UK Slows as Pressure Continues from Inflation

Manufacturing in the UK unexpectedly cooled in March for the third month and might weaken even further, said IHS Markit, which repeated the warning it did last month related to inflationary pressures.

Markit’s Purchasing Manager’s Index dropped from February’s 54.5 to 54.2 in March, but remained above the critical level of 50 that divides growth from contraction. However, it was below expectations of economists that expected 55. A measure for new orders weakened as well.

The factory index compared in a favorable manner to its trend in the long run, said Markit, with the biggest part of the slowdown centered on producers of consumer goods.

While manufacturing likely resulted in a solid contribution during to the economic growth of the first quarter, there is a momentum loss that is visible. The weaker trend is apt to continue during the second quarter, said a senior economist at Markit.

During March, the pound was weaker and helped competitiveness in exports and the confidence of companies remained high. Last month a Deputy Governor with the Bank of England said that exporters were enjoying a pre-Brexit, post referendum period, because the pound had fallen, and trading arrangements in the EU remained in place.

That might change slowly after the Prime Minister of the UK kick started the process to formally withdraw from for the European Union last week, which came nine months following the referendum vote.

While the short term outlook in manufacturing is encouraging, it is possible Brexit uncertainty would start weighing heavy on overall sentiment, said an economist with ING.

Given the quite contrasting negotiation strategies that were outlined by UK and leaders in Europe last week, the risk of altered or reduced access to markets in Europe might begin to become more real.

What that means is that much of the depreciation of the currency since the referendum last June is helping out exporters, but there might not be a large enough boost to the economy overall to offset the expected slowdown in spending by consumers.

The impact of the pound on inflation remains on the table for businesses, with higher price pressures during March, said Markit. A reading of output prices moved back toward the high that was near a record seen during January.

The drop in the pound’s value after Brexit has helped with new orders, said economists but the currency effect is also coming at a price, they added.