Posted on January 9, 2018 at 11:27 am GMTRaffi Boyadjian, XM Investment Research Desk
A weak pound and stronger global growth, particularly in the Eurozone, is driving up demand for British exports, which are boosting the UK’s manufacturing sector even as domestic demand falters amid the Brexit uncertainty. Industrial and manufacturing figures out on Wednesday are expected to show output picked up in November after stalling in October.
Industrial production grew at an annual rate of 3.5% in October – the highest since December 2016, while manufacturing output was up 3.9% – also the highest since the end of 2016. Month-on-month, the figures were less impressive with no change in industrial output and manufacturing activity up just 0.1%. This would explain the expected slowdown in annual growth in November, with industrial output forecast to ease to 1.8% and manufacturing to 2.8%. However, monthly growth is expected to pick up to 0.3% for both indicators.
UK industrial output lagged the Eurozone’s for much of 2017 but has been strong enough to become the bright spot of the British economy, with annual growth overtaking the dominant services sector in August. Slowing consumption, mainly as a result of a squeeze on households’ disposable income from rising inflation and subdued wage growth, is weighing on services activity. Meanwhile businesses have been holding back with their investment decisions despite the upturn in the global economy as key issues about the UK’s post-Brexit relationship with the EU remain unresolved.
The divergence in the fortunes of UK and Eurozone manufacturers was evident in the IHS Markit manufacturing PMI prints for December. The Eurozone’s manufacturing PMI hit an all-time high of 60.6 in December, while the UK’s reading missed expectations to drop 56.3 from 58.2 in November. Although this still represents a solid figure, it does underline that the British economy is growing below potential and not fully benefiting from the uptick in world growth. The outlook for the UK will likely remain clouded until at least the outline of a post-Brexit trade deal is agreed.
If the data on Wednesday beats expectations, the pound could set its eyes on the $1.36 handle again. It failed to beat the September top of $1.3656 when its recent rally stalled at $1.3612. However, after coming out unscathed from this week’s cabinet reshuffle by Prime Minister May, which appears to have done little to reinforce her authority, fresh gains for sterling in the short term are possible, especially if the dollar remains subdued, and the $1.37 level could be within reach. However, if the data disappoints, the $1.35 level could provide near-term support for the pair.GBPUSD