Economic Update: 02 June 2017

UK MANUFACTURING PMI

The UK Manufacturing Purchasing Managers Index (PMI) figure remains close to the record high set in April this year. The figure, released on Wednesday, fell very slightly from 57.3 to 56.7. While the decline suggests a slight weakening in confidence, the overall level remains exceptionally strong. This is happening despite heightened uncertainty around politics right now in the UK and in Europe, but shows that the UK is still very much open for business.

Manufacturers in the UK must contend with fluctuations in the value of the pound. This produces winners and losers, but the key drivers are innovation and productivity. Manufacturing can add meaningfully to economic growth and in this respect exports are extremely important. A weaker pound means factories may receive more orders from abroad, and this can offset some domestic pressures from rising import costs (the flip side of a weaker currency). According to senior economist, Rob Dobson, at Markit, “the sector should have sufficient momentum to see it through the uncertainty generated by the current unexpected general election and into the start of Brexit negotiations later in the quarter”.

In the chart below we show the main sectors contributing to the UK economy. The service sector continues to dominate the scene. Displayed this way one can be forgiven for dismissing manufacturing as unimportant but this massively understates the way manufacturing feeds into the real economy.

Manufacturing interacts strongly with the service sector and further declines add to an imbalance that needs to be corrected to ensure the UK maintains its status in the new world order. Manufacturing is a very important sector for all of us and it is good to see that confidence is high in this area because it provides a strong base to build on in the years ahead.

 

UK Nominal GDP by Industry

Source: ONS, 31 March 2017

UK ELECTION

On the 8th of June, UK residents will take to the polls again, but this time to vote for which party will lead the country through imminent Brexit negotiations. Current Prime Minister, Theresa May believes the general election will ‘strengthen the UK’s negotiating hand’.

This week, YouGov, one of the various organisations carrying out opinion polling to gauge voting intentions, exhibited a narrowing between Labour and the Conservatives. The projection, which showed that the Conservative party could lose 20 seats and miss the required majority of 326 seats by 16 seats, was published in The Times on Wednesday. The poll suggests a possible hung parliament, in which no political party would gain enough seats to secure an overall majority. There has been much scepticism over the legitimacy of YouGov’s estimates, with people quick to declare the story ‘fake news’, and an attempt to scaremonger voters. In addition, as we have experienced in the past with the outcomes of recent events such as the UK referendum and the US election, opinion polls are not always reliable predictors and have an estimated +/- 3% margin of error.  However, they have proven to be useful indicators as seen with the French election result last month.

The pound slipped against the euro and US dollar at the heels of the YouGov poll, but has since recovered.

Composite of UK General Election Polls (%)

Source: Bloomberg, 31 May 2017

CHINA PMI

In contrast to the UK, China’s manufacturing sector contributes a far greater amount to the overall productive capacity of its economy. This means data for the manufacturing sector of the economy are examined carefully.

The Chinese Manufacturing Purchasing Managers Index (PMI) figure, also released on Wednesday, currently stands at 51.2, indicating expansion. In addition, the figure for Services PMI increased to 54.5 thus improving the outlook for both sectors and for the global economy.

China is simultaneously dependent on growth in the global economy and an important contributor to global growth. Thus, a strong global economy supports growth prospects for Chinese manufacturers and vice versa.

There are of course challenges to be faced across such a vast, command, economy. The recent decision to encourage deleveraging (reducing borrowing) is a monetary policy response designed to reduce the risk of a future financial crisis. This policy initiative hikes borrowing costs for factories and domestic consumers. It is designed to slow, not stop, economic growth.

Monetary policies of this kind usually operate with a lag, as shown by recent data on China’s gross domestic product (GDP) which remains strong at a rate of 6.9% over the year to the end of Q1 2017. Looking ahead, and building in monetary tightening, economists predict that that country will meet or just slightly exceed the government’s growth target of 6.5%; thus, we should anticipate a slight deceleration despite the strong Q1 2017 figure.

 

China Manufacturing and Services Purchasing Managers Index

Source: Bloomberg, 31 May 2017

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