UK Manufacturing Output Grows at Quickest Rate in Six Years

September 1, 2020
UK Manufacturing Output Grows at Quickest Rate in Six Years September 1, 2020 Lennox Hamilton

The euro dollar declined against the pound following the release of lower-than-anticipated Spanish and German manufacturing PMI data. The increase in the Italy unemployment rate also contributed to the weakness of the euro.

The pound’s rally was also aided by the impressive increase of the UK’s manufacturing PMI and higher-than-anticipated mortgage approvals. At the time of writing this article, the EUR/GBP pair has declined to 0.8895.

According to IHS Markit, Spanish manufacturing PMI (purchasing managers’ index) declined to 49.90 in August, from 53.50 in the earlier month and missed economists’ forecasts for a reading of 52.50. A reading below 50 indicates contraction and vice-versa.

The reading indicates that the recovery in manufacturing sector has stalled in August, after resuming to growth in July. Backlog of work fell sharply in August, in comparison to July. Another round of job cuts happened in the manufacturing sector, mainly due to spare capacity. Nevertheless input prices rose for the first-time in 15 months, although slightly. Sentiment hit the highest level in six months but still remains below the long-term average.

The IHS Markit also stated that Italian manufacturing PMI increased to 53.10 in August, from 51.90 in July and surpassed Consensus estimate of 52.0. It is the second successive month of increase. Furthermore, the reported figure was the highest in over 2 years. Sharp drop in export orders had a negative impact on the sector.

However, the outlook for next 12 months improved again, with the sentiment reaching the highest level in the history of the series. For the third successive month, factory production increased as fresh orders rose sharply due to an improvement in domestic demand scenario. August marked another round of job cuts as capacity utilization remained poor.

In a separate release, IHS Markit stated that French final manufacturing PMI declined to 49.80 in August, from 52.40 in July. Economists had anticipated no change in the preliminary reading of 49. The reading indicated slight worsening of business situation across the country’s manufacturing industry. Fresh orders, however, increased broadly after remain sluggish in July. Input prices increased for the first time in six months.

According to IHS Markit, German final manufacturing PMI increased to a 22-month high of 52.20 in August, from 51.0 in July, but missed Consensus reading of 53. The index has been rising continuously after hitting a 11-year low in April, when Covid-19 was at its peak.

The figures indicate an improvement of business conditions across the manufacturing sector in August as fresh order continued to increase. Production growth hit the strongest level in two-and-a-half years.

Continuous growth in export sales also assisted in improving order books as a whole, with increasing sales to markets such as China and Turkey assisting in driving the quickest rise in export orders since April 2018.

Manufacturers’ purchasing activity resumed to growth, following successive decrease for the past 22 months. Purchasing costs fell as demand for raw materials remained weak. However, the rate of decrease slowed down for the third consecutive month and reached the weakest level since May 2019. Finally, manufacturers’ optimism hit the highest level since February 2018.

In Germany, data released by the Federal Employment Agency indicated that the number of unemployed individuals decreased by 9,000 in July, following a decrease of 17,000 in the earlier month and better than the 3,000 drop anticipated by economists.

Data published by the IHS Markit indicated that the Eurozone final manufacturing PMI was 51.70 in August, compared with 51.80 in the earlier month. The reported reading was in line with economists’ estimates. The headline reading remained unchanged from the flash estimate of 51.70.

According to the Italian statistical organization Istat, the country’s unemployment rate increased to 9.7% in July, from 9.3% in the earlier month and higher than the 9.1% jobless rate anticipated by economists. Interestingly, in July, after four consecutive month of decrease, employment increased. However, unemployment rate also increased due to a decline in economic activity.

The IHS Markit stated that the UK manufacturing PMI (final) increased to a 30 month high of 55.20 in August, from 53.30 in July, but a notch below the flash estimate of 55.30. Economists had anticipated no change from the flash estimates.

For the third consecutive month, the PMI has recorded a reading above 50. Manufacturing production increased at the quickest rate since May 2014, mirroring solid growth across the consumer, investment and intermediate goods sub-sectors. Manufacturing output grew at the quickest phase in six years.

Fresh orders increased, but employment remained weak as job losses continued for the seventh successive month. Employment in manufacturing sector fell at the steepest rate in 11 years, but input price inflation sped up to 20 month high.

According to the Bank of England, mortgage approvals increased to 66,300 in July, from 40,000 in the earlier month and above economists’ estimate of 55,000. Despite the increase, the reported figure remains below the level of 73,700 recorded in February.

The country’s households and businesses continued to boost sterling money (£26.3 billion) holdings in July, higher than the £16.8 billion recorded in June.

Net borrowing of households was £3.9 billion in July. Consumer credit borrowing of households rose by £1.2 billion July, following four consecutive months of net repayments. While the interest rate on fresh consumer credit borrowing rose 22 points to 4.64% in July, rates on interest-charging overdrafts grew 1.6% to 14.84%. During the reported period, corporates repaid £3.0 billion in bank loans but borrowed £3.1 billion from capital markets.

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