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British manufacturers continued to feel the doubled-edged effect of a weak pound at the start of the year, with cost inflation running at its fastest pace in 25 years, according to a closely-watched business survey.
Markit’s monthly purchasing manager’s survey of UK factories, which measures output, employment and expectations in the sector, hit 55.9, falling back slightly from a more than two-year high in December but was still comfortably in growth territory last month.
Any figure above 50 marks expansion, with the PMI survey a good early indicator of official growth figures. January’s figure was in line with forecasts, with firms reporting the highest output levels since May 2014 but a softening in international export demand.
A weak pound has doubled-edged effects for export oriented industries, helping make their goods more competitive compared to international peers but also pushing up the cost of imported goods used in the manufacturing process.
Markit said input price inflation rose at an “unprecedented” pace and the highest since the start of the survey in 1992, with 55 per cent of firms attributing rising prices to the weak exchange rate.
Manufacturers also cited factors such as rising commodity prices for the gains, which is expected to feed through to higher consumer price inflation.
Britain’s economy has continued to grow at a healthy clip since the Brexit vote with growth at 0.6 per cent in the two quarters after the June referendum – matching its pre-Brexit vote pace and helping the UK end the year as the fastest growing advanced world economy.
Manufacturing accounts for around 11 per cent of the UK’s economic output. Markit will be releasing its January survey on the British service sector – nearly 80 per cent of GDP – later this week.
“The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth going forward”, said Rob Dobson, senior economist at Markit.
“Companies seem fairly sanguine on this front, as a new index tracking business confidence signals optimism climbed to an eight month high”, he said.
Dave Atkinson, head of manufacturing at Lloyds bank, said “firms will be cautious and keeping a close eye on costs”.
“There will be challenges ahead as import prices continue to rise, affecting bottom line profitability, while the impact of some companies’ historical long-term currency hedging coming to an end may expose them to the devaluation of sterling that they have managed against to date”, he added.