Eurozone, UK manufacturing PMI indices dispel Brexit fears, but sterling weakens

05 October 2016 12:30 Source:ICIS News

Photographer PhotoAlto/REX Shutterstock VARIOUS Calculator on top of financial charts 2000 LONDON (ICIS)--The eurozone and UK’s September purchasing managers' indices (PMI) for manufacturing rose this week with the UK’s construction sector even showing its first expansion since May, dispelling fears the country’s vote to leave the EU would cause a downturn.

Meanwhile, UK sterling lost ground this week as the UK’s ruling Conservative party hosted its annual conference in Birmingham, giving hints the coming departure from the EU (Brexit) will rather be a ‘hard Brexit’ – potentially involving a departure from the EU's tariff-free single market.

The eurozone’s manufacturing PMI accelerated in September to 52.6 points, up from 51.7 points in August, while that of the UK posted a healthy 55.4 points for the month, up from 53.4 in August, according to Markit on 3 October.

A reading above 50.0 points indicates economic activity expansion, while a reading below that mark shows a contraction.

Moreover, the UK’s chemical-intensive construction sector’s PMI published on 4 October posted the first expansion in four months to 52.3 points, up from August’s 49.2 points.

However, on Wednesday Markit published the eurozone’s composite PMI – services, the largest part of the economy, plus manufacturing – showing a deceleration to a 20-month low to 52.6 points, down from August’s 52.9 points.

Nevertheless, the brighter picture with which the manufacturing sector concluded the third quarter in the eurozone, however, is bringing some relief to the area’s stubbornly high unemployment rates, with the pace of new hiring accelerating.

“Production gains are being driven by welcome signs of improving demand from both within the region and from wider export markets,” said Chris Williamson, chief economist at Markit.

”For a region beleaguered by still-high overall unemployment, the fact that the upturn is generating more jobs is especially good news. The latest rise in factory payroll numbers was one of the best seen over the past four years.”

In July, the president of the European Central Bank (ECB), Mario Draghi, said he was confident the 19-country currency union’s economy would resist the impact from Brexit in the near-term, although warned the full effects of the UK’s exit from the EU would take long to be felt, at least until the “trading channels” between the two areas are clarified.

After the initial shock in July’s figures for services, construction and manufacturing, the UK’s economy experienced in August and September a rebound which many supporters of the departure from the EU have seen as a proof Brexit would not be as damaging as Bank of England (BoE) or other institutions had predicted while supporting the Remain campaign.

The BoE at the beginning of August, however, unleashed a package of extraordinary measures and cut interest rates in order to fend off a potential downturn; that package, according to analysts, helped the economy gained confidence in August and September.

Brexit, whenever it comes, is still a long way ahead and the UK continues having full membership to the bloc, trading tariff-free and taking advantage from a depreciated sterling pound helping exports.

A good string of positive PMI indices in the UK normally brings a rebound of its currency, but sterling lost ground on 3 October – currently trading at £1:$1.27, a 30-year low.

The reason for the fall came from the political side, according to analysts, as the UK’s Prime Minister, Theresa May, addressed on 2 October her Conservative party’s annual conference and hinted the UK’s exit from the EU will mean the country will not be subject to jurisprudence from European courts and controlling the flux of EU nationals comings to its shores.

Theresa May at Tory conferenceDeparting: those in the UK supporting a 'hard Brexit' found relief in
 May's speech at the Conservative party's conference on 2 October
Source: James Gourley/REX/Shutterstock

By all accounts, political analysts said that meant exiting the single market. The 28-country common market is ruled by EU-wide laws and courts, while the free movement of people within the EU is another condition to be able to trade tariff-free goods around the bloc.

The UK’s business community is alarmed. In July, the CEO of the national chemical trade group CIA, Steve Elliott, said continued membership to the EU single market was key to the sector’s operations, as around 60% of its exports are eurozone-bound.

The country's dominant services sector, and within it the City of London and the important financial services, are also fearful the loss of rights to trade in euros would deprive them of an important source of business.

Commentators in the UK are talking about ‘hard’ and ‘soft’ Brexits as potential departure scenarios. Exiting the single market altogether would be rather a ‘hard Brexit’, and some analysts are giving the supporters of a 'hard Brexit' the winning hand after the latest positive economic figures. Within May's own government, those supporting a hard Brexit are numerous.

“As the Conservative Party conference rumbles on 'hard' Brexit concerns have only intensified with the vast majority of politician comments pointing toward a bumpy road ahead,” said analysts at German investment bank Deutsche Bank on Wednesday.

“At the same time, the IMF [International Monetary Fund] also revised up its 2016 (by 0.1%) growth forecast for the UK to 1.8% which would make it the fastest growing economy in the G7. The agency did however cut its 2017 UK forecast to 1.1% from 1.3%. The collapse in sterling has however, along with the robust data, made for a strong rally in UK equities.” 

Despite the UK's revision, the IMF worries the world economy is slowing down and on 4 October lowered its outlook for global GDP, with growth in 2016 expected to expand by 3.1% and by 3.4% in 2017, representing a 0.1 point downgrade from the group's earlier estimate in April.

Eurozone PMI manufacturing last 12 monthsAfter three months of falls, the eurozone's September
PMI manufacturing came at 52.6 points.
Source: IHS Markit

Focus article by Jonathan Lopez

By Jonathan Lopez