The Markit/CIPS UK manufacturing purchasing managers index (PMI), released Thursday morning, posted a record 5-point rise to 53.3 in August, following July's 41-month post-Brexit low. The index's long-run average is 51.5; readings above 50 indicate expansion, while readings below 50 signal contraction. The data suggest resilience on the part of British manufacturing, which makes up around 11% of GDP, after the UK voted to leave the European Union in June. Unfortunately, the celebration may be short-lived.
According to IHS Markit Ltd., the weaker pound is "by far the main factor" in the manufacturing sector's recovery. The currency closed down nearly 6% against the euro in the session following the surprise referendum result and slid further in the subsequent weeks. Cheaper sterling has made British exporters' wares more attractive in the U.S., Europe, China, Southeast Asia, the Middle East and Scandinavia.
The pound rose 1.1% against the euro following the data release Thursday morning. (See also, Why Doesn't Britain Use the Euro?)
"Companies reported that work that had been postponed during July had now been restarted, as manufacturers and their clients started to regain a sense of returning to business as usual," wrote Markit senior economist Rob Dobson.
The weaker pound has has also led to rising input costs, however, with nearly 44% of firms reported higher purchasing costs in August. (See also, Will the UK Slip into Recession Post-Brexit?)
Another concern is that many of the trade links that boosted British manufacturing this month will weaken when the country begins the process of formally withdrawing from the EU. Prime Minister Teresa May has said the government will not begin the process, detailed in Article 50 of the Lisbon Treaty, before the end of this year. Controversially, her cabinet said Wednesday that there would be no parliamentary vote on triggering the process.
Article 50 sets a two-year limit for negotiating the exiting country's relationship with the EU. Negotiating new trade deals with non-EU countries is supposed to wait until the completion of that process, though Britain might sidestep that prohibition. Those trade deals could in turn take years to be finalized, leaving British business in flux. Brexit advocates argue that the deals' terms can be negotiated ahead of time and take effect as soon as the UK leaves the EU.
Manufacturing slowed slightly in the eurozone, with Markit's PMI for the 19-nation bloc falling from 52.0 to 51.7 in August. The strength of the euro relative to the pound may have contributed to the result. Italy joined France in showing contraction in the manufacturing sector. (See also, European Banks: The Eurozone's Next Powder Keg?)
For now, Britain is in a sweet spot, with a newly cheap currency relative to its trading partners and all the trade deals it had before the referendum still in place. As Craig Erlam, senior market analyst at Oanda, points out, consumer spending also has yet to suffer. "It would appear that the early impact of Brexit is a win-win for U.K. manufacturers," he says, but cautions, "it's still very early in the process and much of the pain caused by Brexit will likely come later on."