Strong Exports Helped Recovery of the British Manufacturing Sector After Brexit

The British manufacturing sector recorded one of the strongest recoveries in August since these statistics have been tracked, recovering from the initial shock caused by the referendum decision to exit the European Union, supported by the sharp decline of the pound after the referendum.

The Purchasing Managers’ Index (PMI), produced by the London research firm Markit, which represents an important indicator of factory activity, jumped to 53.3 points in August, the highest level in the last 10 months, after plummeting to the lowest level in the last three years in July, following the referendum. The July value of this index has meanwhile been slightly revised upwards to 48.3 points, from the initially estimated 48.2 points.

The jump of as much as five index points on a monthly basis is among the most pronounced increases recorded in the manufacturing sector activity report in nearly 25 years since these statistics have been tracked. It far exceeded all estimates from economists in a Reuters survey.

Recent reports have shown that demand from British consumers has remained stable despite the referendum decision to exit the EU, and the latest Markit report from the manufacturing sector – responsible for 10 percent of total British economic activity – indicates that it has coped with the initial shocks better than feared.

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Markit reported that companies informed them about the resumption of business that they had put on hold in July, as their clients saw that business was slowly normalizing. “The domestic market showed significant recovery, especially for consumer goods, while the recent depreciation of the pound has spurred a greater influx of new business,” explains Markit economist Rob Dobson.

Furthermore, the manufacturing sector report for August showed that foreign orders were arriving at the fastest pace since June 2014, although the overall growth of orders was weaker compared to the rapid growth in June. Factories also reported that they increased their production in August at the strongest rate since January.

– Undoubtedly, this is a very impressive recovery of the core index. We expected that exports of manufactured goods would do well after the referendum decision because its advantage is that the weakening of the pound works in its favor, but it was a surprise that domestic business also strengthened, said Investec economist Chris Hare.

Next week, economists will closely monitor the corresponding Markit report from the British services sector – far larger and more focused on the domestic market – to see if those figures reflect the recovery in the manufacturing sector recorded in August.