Signs are growing that the weaker pound is boosting demand for UK manufactured goods, helping to reduce the country’s reliance on consumer spending to drive economic growth. Interviews conducted with at least 700 UK businesses during June and the first half of July by agents of the Bank of England suggest activity has picked up in export supply chains and that UK manufacturers are increasingly producing goods that were previously imported.
This pick-up in demand, supported by the depreciation of sterling since the Brexit vote and an acceleration of growth elsewhere in the global economy, has encouraged some manufacturers to invest more both to improve efficiency and expand capacity. Sterling has depreciated by 14 per cent on a trade-weighted basis since the Brexit referendum.
The BoE report, released on Wednesday, suggests manufacturers’ plans for investment during the next 12 months remain stronger than they have been at any time since spring 2015. Investment intentions among services companies have also recovered during the past year, following a sharp fall immediately after last summer’s vote to leave the EU.
However, the report also said that Brexit-related uncertainty had “continued to weigh on some firms’ longer-term spending plans”, particularly those that are more exposed to potential changes in future trading relationships. Companies’ demand for credit has remained muted even though credit availability has improved.
While growth in the manufacturing sector appears to have accelerated, consumer spending, which has been the engine of economic growth in the UK in recent years, slowed further in June and July. Some of the companies that the Bank spoke to attributed this to greater caution among consumers and to shoppers trading down to cheaper brands or products.
The value of consumer services purchased — including hotel stays, restaurants, bars and other forms of entertainment — grew during the past year at the slowest rate since spring 2013, despite rising prices. The findings of the Bank’s agents’ survey on manufacturing and export activity is in line with other surveys, such as the monthly purchasing managers’ index.
These surveys have also provided a different picture from the official data published by the Office for National Statistics. Manufacturing output contracted in the second quarter of the year, according to the ONS, while surveys had pointed to an expansion. The Bank’s Monetary Policy Committee last week highlighted the importance of an economic rebalancing to ensuring growth in the UK picks up during the next few years in the way it has forecast. The BoE expects the rebalancing to be supported by strong growth elsewhere in the world.
However, Mark Carney, Bank governor, warned that “continued uncertainties around Brexit [mean] business investment is still likely to grow below historic average rates with adverse consequences for productivity, capacity and wages”.
The latest interviews conducted by the Bank’s agents reinforce mixed messages about the state of the UK labour market. Recruitment difficulties have become more severe and spread to a wider range of sectors and skill areas. Wage growth remains subdued, with most recent pay awards being between 2-3 per cent, despite the Bank’s forecast that inflation would peak at about 3 per cent in October.
Some companies have told the Bank’s agents that they are cautious of offering higher wage settlements until they have greater clarity about the trading conditions and level of demand they will face in future after the UK leaves the EU.