Record manufacturing surge boosts pound

 

The pound strengthened today as the UK's economic outlook was brightened by data showing a record surge in manufacturing activity.

The Mini production line at the Cowley car plant, Oxford.

Manufacturing sector output grew at its fastest pace since records began 19 years ago, according to the Chartered Institute of Purchasing & Supply's (CIPS).

The activity index rocketed to a better-than-expected 62 in January from an upwardly revised 58.7 in December. A reading over 50 indicates growth.

The figure suggests a welcome recovery to the UK's economic fortunes after recent data showed a dramatic slump in growth in the last quarter of 2010.

The currency markets reacted to the news by buying up sterling: the pound ticked a cent higher against the dollar, from $1.60 to $1.61 - its highest level versus the dollar for more than two months.

That continues a sudden recovery in the last 36 hours from a week-starting level of $1.585.

The euro also fell to 85.4p (€1.171 to the pound) from 86.2p (€1.160).

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club, said that, 'There were few concerns about the manufacturing sector prior to the release - and no suggestion of any snow disruption in the December figure - so we will have to wait for Thursday's services data before we can all put our minds at rest about the ability of the economy to bounce back from last week's Q4 GDP figure.'

But the survey will add to inflation fears as it showed record input costs and the biggest leap in factory gate prices since August 2008. That in turn will heap further pressure on the Bank of England to raise interest rates.

Two Bank policymakers voted for an increase at the January meeting after consumer prices index inflation rose to a far higher-than-expected 3.7% in December.

Andrew Oxlade

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'The rapid growth in costs and prices will make for uncomfortable reading for certain members of the MPC,' said Goodwin. 'But it comes as little surprise given what we know about recent movements in oil prices, in particular.

'However, we continue to expect these pressures to ease over the coming months, with market speculation to blame for a significant portion of the recent increases, and emerging markets demand likely to throttle back as their economies continue to tighten policy.'

Money markets reacted vigorously on the PMI news, instantly pricing in a greater chance of a rate rise. The five-year interest rates futures 'swaps', which traded as low as 2.74% after last week's GDP shock figures, leapt from 2.92% to a high of 3%.

Two-year swaps were up from 1.76% at the open to as much as 1.83%.

The Treasury maintained that today's manufacturing figures lent support for its hopes to rebalance growth to the private sector as it slashes public spending.

A spokesman said: 'A growing manufacturing sector is vital if we are to rebalance the economy towards trade and investment, in order to have sustainable growth.'

But Samuel Tombs at Capital Economics said he was sceptical that the sector 'will manage to keep growing at this sort of pace for much longer'.