UK manufacturing sector beats economists’ expectations as companies prepare for departure from EU
The Brexit stockpiling boost to the manufacturing sector has failed to cheer up currency traders, who have sold off the pound against the US dollar.
When Theresa May comes back with those reassurances that she has been seeking from the EU that the deal that is on the table is not going to lead to us being permanently trapped in the customs union … she will find a way to get this deal through parliament.
Some more reaction to the UK’s manufacturing PMI data. The main verdict? While the headline may look encouraging, be wary.
The marked increase was driven by stockpiling of goods and raw materials in preparation for possible disruption if there is no Brexit deal by 29 March. Stocks built now will have to be run down eventually, potentially lowering demand in future months.
It’s worth remembering that the manufacturing sector makes up a relatively limited share of economic output – around 10% of GDP. More importantly, warehousing is in relatively short supply, leaving firms with fairly limited scope to boost inventories.
The absence of any New Year joy from the European PMI data also confirms that the near future holds a bumpy ride for UK manufacturers.
Department store chain John Lewis has reported that sales rose by 4.5% in the week to 29 December, while sales at its Waitrose supermarket surged by 19.2%.
The firm is one of the first major British retailers to reveal its Christmas performance, at a time when analysts are nervously looking out for more pain on the high street.
A quick check-up on the FTSE 100 after the manufacturing data beat expectations: the sell-off has slowed slightly, but miners remain under pressure.
The benchmark index is now down by around 60 points, or 0.9%, with betting company GVC Holdings and grocery logistics company Ocado vying for the top spot – both are up by around 2.6%. Next shares are now up by 1.8%.
ITV’s chief financial officer stepped down from the board on new year’s eve.
The FTSE 100 broadcaster had announced in June that Ian Griffiths, who also held the role of chief operating officer, would retire within 12 months.
Brexit uncertainty may actually be helping British factories weather slowing global growth – although it is an irony not many major manufacturers would appreciate.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The pick-up in the PMI in December suggests that preparations for Brexit are helping manufacturers to keep their heads above water during the current global slowdown.”
December’s PMI doesn’t alter our view that the manufacturing sector will struggle over the coming months and that GDP growth will be well below-trend in Q4 and Q1; we expect quarter-on-quarter growth of 0.2% and 0.3%, respectively.
Factories are stockpiling the raw materials they need for their work as well as the products they sell as they prepare for possible disruption.
BREXIT STOCKPILING LATEST
• UK factories’ stocks of finished goods rise at 2nd fastest rate since records began in 1992 – PMI
• Stocks of materials purchased rise at 4th fastest pace on record https://t.co/Szwm2ZfaJo pic.twitter.com/CtjKDQPKlQ
The overall reading for British manufacturing showed the fastest expansion in six months for the sector. Unsurprisingly, it’s Brexit which is seen as the driving force.
Growth in new orders rose to a 10-month high, with inflows from domestic and foreign buyers. IHS Markit said:
Manufacturers linked increases in both domestic and overseas demand to clients purchasing to build up safety stocks to mitigate potential Brexit disruption.
UK manufacturing activity came in significantly higher than expected at the end of 2018 thanks in part to a steep rise in stockpiling ahead of Brexit, according to a closely followed survey.
The manufacturing purchasing managers index rose to 54.2 in December, up from 53.1 in November, data firm IHS Markit reported. Economists had expected a slowdown to 52.5.
The rise in the PMI level during December was mainly driven by stronger inflows of new business and a solid increase in stocks of purchases. Movements in both mainly reflected Brexit preparations by manufacturers and their clients.
The European Central Bank has been busy celebrating 20 years of the euro this new year, but today it was forced to announce less pleasant news: Italian lender Banca Carige has been put in administration.
Eurozone manufacturing activity has fallen back from boom time a year ago to “near stagnation” now, according to Chris Williamson, chief business economist at IHS Markit.
December saw the third consecutive drop in new orders, in an onimous sign for the eurozone economy. Williamson said:
The weakness of the recent survey data in fact raises the possibility that the goods producing sector could even act as a drag on the overall economy in the fourth quarter, representing a marked contrast to the growth surge seen this time last year.
The eurozone manufacturing purchasing managers index (PMI) fell to 51.4 in December, the lowest since February 2016.
There is likely to be little relief for European stocks from manufacturing figures, with IHS Markit’s barometer coming in at the consensus, but with a notably weak reading for future output.
At the other end of the scale, there’s Debenhams.
The department store is one of the most shorted shares on the London Stock Exchange. That bet would have paid off handsomely over the last year: shares were worth 35p a year ago; now you’ll pay only 4.8p after another 6% slide today.
An interesting and unlikely top gainer amid a steep FTSE 100 sell-off: a British retailer.
Next is the second top riser amid London’s blue-chip stocks, with a 0.6% gain.
We seem to be set for a bad day across the eurozone as well – unless manufacturing data can give investors some cause for excitement.
It’s a sea of red across European markets, with France’s Cac 40 suffering a particularly nasty 2.3% sell-off.
And it’s an unhappy new year from the FTSE 100 too, with more than 100 points knocked off at the open.
Here’s more detail on what is already shaping up to be the big story of 2019: whether global growth is dragged back by a slowdown in China.
Today’s Chinese data underline concerns that the world’s second largest economy is “heading for a tough 12 months”, writes Martin Farrer in his report.
Happy new year, and welcome to the first business live blog of 2019, with rolling coverage of the world economy, financial markets, the eurozone and business.
The report implies deteriorating demand, with production likely to reflect that in coming months. Leading indicators suggest that activity is unlikely to begin a recovery until the second half.
Link : British factories boosted by Brexit stockpiling – business live