The recovery of Britain’s manufacturing industry in August has prompted a spike in the value of the pound as it reached an impressive $1.33 as UK factory activity smashed all expectations. Indeed, the recovery from July’s contraction was the joint largest in Markit’s 25 year history of producing their PMI.
The course correction of the pound has also triggered the IMF to suggest that the turbulence of the shock Brexit vote has ‘ebbed’. This comes just months after the IMF said that the Brexit vote could cause a vicious cycle of falling house prices and slower growth, and marks something of a row back from their earlier statement.
The fund said that growth in the run up to the referendum had “surprised on the upside” whilst the measures taken by the BoE would boost growth and support the economy, helping to cushion some of the negative impact. However, the IMF still expects a sharp slowdown in growth during Q3, following growth of 0.6% in Q2.
In a report ahead of this week’s G20 meeting in China, they said "In the United Kingdom, while second-quarter growth surprised on the upside, more recent data foreshadow a sharp slowdown after the referendum. Further ahead, the outlook will be affected by the degree to which the future relationship with the European Union can preserve the benefits of economic integration and trade…. While political uncertainty remains concerning the development of the relationship between the United Kingdom and European Union, short-term turbulence has ebbed."
All of this has prompted that aforementioned rally in the value of the pound, but whilst it indicates a growing confidence in the UK, it could also have a negative effect.
The record equalling recovery of the UK manufacturing industry came off the back of the falling value of the pound. Overnight, that meant that purchasing goods like our hydraulic hose fittings from overseas was much cheaper than before. That gave the UK manufacturing industry a competitive advantage which now may come to an end thanks to the rebounded pound.
The cost of purchasing from the UK is still much lower than it was before the referendum result came in, but nevertheless, it remains the case that a more valuable pound could decrease overseas orders, and put the recovery in jeopardy. The threats of a rising pound are somewhat mitigated by the lowered costs of British manufacturing firms buying in from abroad.
However, it remains to be seen whether levels of investment in the UK’s manufacturing companies will increase following the Brexit vote. Companies are naturally unsure of what deal exactly the UK will strike with its biggest trading partner, the EU. Should the UK fail to strike a favourable deal, it could well be we see another contraction in the UK’s manufacturing industry as companies withdraw funding and support.