The UK economy has settled down into a post EU-referendum pattern. Consumer spending is being constrained by the fall in the value of the pound, which has pushed up inflation by making imports dearer. But manufacturing has started to do better, in part because the weakness of sterling has made exports cheaper.
For many years, policymakers have longed wistfully for a rebalancing of the economy towards production rather than consumption. The latest survey of purchasing managers from CIPS/Markit shows that a modest re-adjustment is now under way.
Despite the easing back in the purchasing managers’ index (PMI) in December, the performance for the fourth quarter of 2017 as a whole was the strongest for more than three years. Order books are strong and the price pressures caused by the pound’s fall in the second half of 2016 have started to abate. Analysts say the evidence from the PMI survey is consistent with manufacturing growth of around 1% a quarter – an encouraging performance by the UK’s recent standards.
But not nearly as encouraging as that of the eurozone, which is at its highest level since the survey was first published two decades ago. The UK’s PMI for December stood at 56.3; that for the eurozone stands at 60.6. The gap has not been wider for almost a decade.
It appears to be healthy demand from Europe, North America and the Middle East that is helping UK exports, with a more competitive currency a secondary factor. That’s because firms have seen the fall in the value of the pound as an opportunity to plump up their profit margins rather than to cut prices and sell more.
Samuel Tombs, UK economist at Pantheon Macroeconomics, says cuts in planned investment since the referendum now mean UK industry is struggling to meet the higher demand. Firms have been running down their stocks of finished goods to meet orders but work backlogs are now increasing. Manufacturing’s share of gross domestic product has been in steady decline for decades and it now accounts for just 10% of the economy. Even after recent growth, UK factories are still producing less than they were before the deep recession of a decade ago.
The good news from the PMI survey is that the recent pick-up in manufacturing output has been concentrated in investment and intermediate goods, which suggests that companies are seeking to expand capacity. The bad news is that it might all prove to be a bit too late to make up for a longstanding reluctance to invest that the Brexit vote has exacerbated. Without that investment, the current rebalancing will be impossible to sustain.