British factories enjoyed their best month in more than four years in November, suggesting manufacturing will give a boost to the country's otherwise sluggish economy going into 2018, a survey showed on Friday. The IHS Markit/CIPS UK Manufacturing Purchasing Managers' Index (PMI) jumped to 58.2 from an upwardly revised 56.6 in October, hitting its highest level since August 2013 and topping all forecasts in a Reuters poll of economists.
Sterling rose briefly against the dollar after the PMI showed surging orders at home and from Europe's recovering economy. Overall, the survey added to signs that manufacturing could be a bright spot next year, when the slowdown in the overall economy is likely to deepen as Britain approaches its departure from the EU in March 2019. Still, the British PMI was not as strong as the euro zone's and export orders grew faster in other major European economies - suggesting the pound's fall since last year's Brexit vote has yet to give British factories a big advantage.
Higher inflation - largely due to the fall in the pound - has pushed up costs for households and businesses this year, contributing to Britain's lagging economic performance compared with European peers. A broadening of price pressures represented a downside in the latest PMI, with factories facing extra costs from supply chain bottlenecks, overtaking sterling's weakness as the main driver of price increases. HSBC economist Chris Hare said the solid growth among factories and the price pressures might appear to bolster the case for a further tightening in monetary policy by the Bank of England which raised interest rates for the first time in a decade last month.
"But manufacturing only makes up 10 percent of the economy, and the more domestically-focused service sector - worth around 80 percent of GDP - is probably more exposed to Brexit-related uncertainty and the inflation squeeze on household income," Hare said. A PMI survey of the services sector is due to be published on Tuesday.
The European Commission's gauge of British factory orders hit a 29-year high last month - but this was not enough to prevent a drop in wider economic sentiment caused by a slowdown among services firms. Manufacturing association EEF highlighted the strong growth in the European and global economies as positives for British manufacturers. "On its current course, manufacturing production is rising at a quarterly rate approaching 2 percent, providing a real boost to the pace of broader economic expansion," Rob Dobson, director at survey compiler IHS Markit, said.
Official figures on British manufacturing, which painted a gloomier view than the PMI surveys for much of this year, have also now started to show improvement. Producers of capital goods such as machinery had a strong month, a good omen for Bank of England officials who think business investment will accelerate next year.