UK factory growth cools as weak pound fuels cost pressures: PMI

December 1, 2016 4:36 AM EST

A worker at perforating company Bion uses a machine at the factory in Reading, Britain September 22, 2016. REUTERS/Peter Nicholls/File Photo


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By Andy Bruce

LONDON (Reuters) - British manufacturing growth cooled unexpectedly in November as factories grappled with soaring costs caused by sterling's slump after June's Brexit vote, even before this week's jump in oil prices.

Thursday's Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI) also suggested the weak pound failed to boost exports by as much as in previous months.

Britain's economy has performed much better than expected since June's vote to quit the EU. But a bigger test will come next year when inflation is expected to rise sharply, eating into households' spending power.

The PMI's gauge of prices paid by factories for materials and energy shot up at a rate just shy of October's near six-year high, while prices of finished goods again rose sharply.

Export growth, however, waned further from September's five-and-a-half year high.

Wednesday's 10 percent surge in crude oil prices - after OPEC and Russia agreed to restrict production - pushed the dollar cost of oil close to levels not seen in 18 months, and drove home the cost pressures facing British manufacturers.

"Once again, price growth is the key story from this reading," said HSBC economist Elizabeth Martins, who warned the spike in oil prices risked further aggravating factory costs.

"For the manufacturing sector, this is not good news, undermining the positive effects from weaker sterling on competitiveness."

The PMI's headline index fell to 53.4 from 54.2 in October, undershooting expectations for a rise to 54.5 in a Reuters poll of economists. Sterling, soaring 1 percent on the day against the dollar, showed little reaction.

Business investment is another doubt hanging over the economy. The Markit/CIPS survey showed signs of weakness.

"The trend in new orders for investment goods such as plant and machinery has eased sharply so far in the fourth quarter," Rob Dobson, senior economist at IHS Markit, said.

Manufacturers, heavily reliant on migrant labor, hired greater numbers of staff last month, the PMI showed.

Official data on Thursday showed net migration from the EU to Britain hit a record high in the 12 months running up to June's Brexit vote.

But some employer groups said firms were worried about a shortage of skilled workers, citing signs that the weak pound may already have made Britain less attractive for migrants.

"There is a strong likelihood that the recruitment and retention challenges of employers will be exacerbated further when EU migration restrictions are introduced, which will affect low-skilled employers especially," said Gerwyn Davies, labor market adviser at the Chartered Institute of Personnel and Development.

(Editing by Larry King and Hugh Lawson)



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