EY ITEM Club - Manufacturing survey ends 2016 on 30 month high

3 January 2017

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  • Manufacturing survey ends 2016 on a 30-month high…
  • …with sterling’s weakness continuing to bolster the sector
  • The weak pound should act to insulate ‘the makers’ from what is likely to be a softer year for domestic demand

Martin Beck, senior economic advisor to the EY ITEM Club, comments:

“Having softened a touch in November, December’s manufacturing PMI more than made up for the previous month’s dip, with the index increasing from 53.6 to 56.1. This was well above the long-run average of 51.5 and represented the strongest reading since June 2014. It also left the PMI for the fourth quarter as a whole at a two-and-a-half year high.

“Domestic demand appears to be holding up well, while the survey’s measure of export orders also increased for the seventh successive month, aided by the weaker pound. However, sterling’s depreciation continued to translate into relatively rapid increases in input prices. Meanwhile, December’s survey pointed to the production of investment and intermediate goods expanding at a faster pace than consumer goods, offering some reassurance in light of fears that Brexit-related uncertainty will sap business investment.

“On the basis of past form, the manufacturing PMI points to output expanding close to 1% in Q4. However, while official data for the quarter is currently only available for October, that output fell by 1% in that month which means that the sector will struggle to emulate the survey’s buoyant picture. Looking forward, 2017 is likely to see a slowdown in domestic demand as higher inflation bites. But a likely continuation of sterling’s weakness and a stronger global outlook offers some cause for optimism among ‘the makers’.”