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Brexit Britain’s Focus Moves to Manufacturing

For decades, growth in the UK has been led by a strong services sector first, and a flagging manufacturing sector second. However, new survey data released within the last week seems to show that the pendulum is beginning to swing in the opposite direction.

Growth in the country’s dominant services sector eased back during January to the slowest pace for four months, according to the report published by Markit. The Markit/CIPS inde fell from 54.5 in January from 56.2 in December.

Whilst potentially foreshadowing bad news for the services economy, it remains the sixth consecutive month of growth in the services sector, providing a boost for the soon-to-be post-Brexit economy. Any number above 50 indicates growth, whilst anything below it indicated contraction.

The fall in growth follows a number of other published surveys that have indicated a fall in consumer borrowing and confidence. Lloyds, for example, found that customers were paying more for essentials because of higher prices trickling down. However, we’ll have to wait a couple of weeks to confirm if that slowdown is anecdotal or genuine.

Indeed, Samuel Tombs, chief UK economist at Pantheon Macroeconomics believes that these numbers might overestimate how well the services sector is doing as “it excludes retailers, who likely will find that consumer demand crumbles as they pass on higher import prices”.

Meanwhile, the PMI survey for manufacturing has shown that growth in the sector accelerated to its fastest rate in years off the back of higher orders from home and abroad. It’s a sign that the industry could be back on the rise, and might well help the UK rebalance itself when Article 50 is triggered later in the UK.

However, it’s not all good news for manufacturing as costs soared to their highest since Markit began taking records in 1992, which could well limit the impact of a manufacturing resurgence.

Indeed, it’s thought that the increased costs of manufacturing could lead to higher costs for consumers, further limiting the services sector. As a company which specialises in JIC fittings and hose fittings UK, primarily sold to other manufacturing businesses, the cost of increased materials is poised to hit.

Rising prices will likely constrain growth for 2017, said Scott Bowman, UK economist at Capital Economics. He’s just one of the many economists expecting that increases this year will erode the spending power of the consumer in the UK.

Nevertheless, Mr Bowman said “We think that these forces will result in a rare period where manufacturing sector growth is higher than that in the services sector.”

Capital Economics latest forecast predicts that saving rates will fall to their lowest level since 1963 as consumers borrow to cope with the rise in prices, rather than cut back on spending. Whether these forecasts are correct will be hotly contested over the next few years, but if consumer spending falls sharply, then so will the economy as a whole.

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