Manufacturing and jobs slowdown pounds sterling

Disappointing data on manufacturing output and private sector jobs add to the economic gloom - and makes an interest rate hike look even more distant...

by James Taylor
Last Updated: 19 Aug 2013
ust what we didn't need to welcome us back from our bank holiday revelries. Our manufacturing sector, one of the few bright spots in the UK economy lately, appears to have suffered a surprising slowdown in April: the Markit/ CIPS purchasing managers' index (which measures activity in the sector) fell to 54.6, its worst figure in seven months. Admittedly there were some extenuating circumstances. But with new data from Reed showing another fall in the number of jobs available in the private sector, and Deloitte suggesting that we're about to suffer the worst drop in take-home pay since the 1870s, the chances of the Bank of England Monetary Policy Committee hiking interest rates this week look remote, to say the least. No wonder the pound has plunged this morning...

It's worth stressing that any reading of 50+ represents an expansion, so the sector is still heading in the right direction - as it has been for 21 months in a row now, in fact. Equally, some kind of slowdown was always likely after the Q1 snow-related bounce - while there's also been lots of disruption to the global supply chain caused by events in Japan.

On the other hand, this reading is indubitably lower than expected (the consensus forecast was more like 57). And the slightly worrying bit is that according to Markit/ CIPS, the main reason for the slowdown was a drop in domestic demand; exports are still growing strongly (with orders up again last month), but domestic customers seem to be cutting back their spending.

This is hardly surprising. We're constantly being told at the moment that UK consumers are feeling poorer than they have done for ages, thanks to the lethal combination of rising prices and the Government's squeeze on take home pay. The latest effort to quantify this comes from Deloitte, which suggests that we'll see our disposable income shrink by an average of £780 per household in 2011. It also reckons real incomes will shrink for the fourth year in a row, apparently the first time this has happened since the 1870s - and may not bounce back to 2009 levels until 2015.

It's a point that's further emphasised by Reed's index of private sector vacancies. Along with a 2% drop in vacancies in April compared to March (which was itself down from February), the data also shows salaries for new jobs last month were 1% lower than they were at the end of 2009. So prices are much higher, but wages are actually shrinking.

At the start of the year, the City had pencilled in May as the most probable date for the next hike in interest rates - but in light of the above, that looks highly unlikely. Speaking yesterday in Brussels, Bank of England Governor Mervyn King suggested hiking rates could have a devastating effect, given the high levels of consumer indebtedness. And since all the economic data is pointing to a UK recovery that's softer than Pakistan's anti-terrorism policy, the MPC looks set to take the same view on Thursday. Good news for mortgage holders; bad news if you're about to exchange some money ahead of your summer holiday.

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