Manufacturing hit by currency ‘double-whammy’

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Manufacturers are battling against a “double whammy” as the strong pound constrains exports and fuels a surge in cheap imports, experts have warned.

Rob Dobson, chief economist at financial information firm Markit, said the industry is set to act as a “minor drag” on the country’s growth, as currency weighs on international trade.

The economist called for the recently-elected Conservative Government to revive the sector, support business investment and boost export competitiveness to rebalance the UK economy.

Industry data “called into question” expectations of a broad rebound in UK growth in the second quarter of the year, Mr Dobson said.

AES, Croda, SIG and Burberry recently warned of the negative impact of sterling’s strength on sales and conversions.

AES Engineering said it lost £2.7m on the South African rand, £1.7m on the US dollar, £498,000 on the Brazilian real and £666,000 on the Argentinian and Chilean pesos at its full-year results.

Luxury brand Burberry, which produces its signature trench coats in Castleford, was hit by a £38m adverse exchange rate impact last year.

It also revised down the £50m currency boost forecast for 2016 to just £10m at current rates.

The strength of sterling is serving a “double-whammy” for economic growth, Mr Dobson said.

He said: “Where growth is being reported by manufacturers, this remains heavily dependent on the domestic market, and consumer demand in particular.

“The challenge therefore remains for the new Government to take the necessary steps to revive manufacturing, boost investment spending and improve export competitiveness if any headway is to be made on achieving the long-promised rebalancing of the UK economy.”

Mr Dobson’s comments come as industry survey figures showed a slight increase in production in May, after a sharp fall in April.

The latest Markit/CIPS Purchasing Managers’ Index (PMI) stood at 52 for last month, marking the 27th consecutive month of growth.

April’s data suggested a sharp slowdown, falling to 51.8 from 54 in March. A reading of 50 or more represents growth.

Markit said the manufacturing sector saw modest expansions of output and new orders in May, thanks to a solid domestic market that continued to offset lacklustre overseas demand.

The consumer goods sector remained the stand-out performer, while investment goods producers were also boosted. Selling prices also rose for the first time in five months.

However, the sector’s “growth funk” is hurting job creation, Mr Dobson said, with payroll increases easing further in May.

Deloitte partner Kate Darlison said while the outlook is “not quite a perfect picture”, there is a lot for manufacturers to be positive about.

The increase in the PMI comes on the back of a very long period of sustained growth, while wider economic growth remains on an upward trajectory, she said.

Ms Darlison said: “Last week’s Q1 GDP data may have only shown small growth compared to the previous quarter, but there was still strong growth of 1.3 per cent, when compared to Q1 2014.

“Coupled with increased GDP forecasts for key industrial nations such as the USA and Germany, and a strong dollar aiding UK exports, there is a positive outlook for the British manufacturing industry.

“This reinforces the fact that the sector plays a fundamental part in the UK’s economic growth story.”

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Eurozone factory growth was weaker expected last month, as Germany and France continue to struggle, the latest PMI figures showed.

Manufacturing growth on the continent was 52.2 in May, up from 52 in April. Germany saw low growth last month with a PMI of 51.2, while France’s factories remained in decline, at 49.4.

Across the Atlantic, the US saw the slowest growth in new orders since the start of 2014. However, manufacturing remained firmly in growth with a PMI of 54.

In China, operating conditions continued to decline, with the HSBC PMI at 49.2 in May, up from 48.9 in April. Last month marked the first contraction in output for the country in 2015.