After the effects of Brexit saw the pound fall to its lowest levels for 30 years last June as uncertainty surrounded the UK’s economic future, the first few days of 2017 show some rays of sunshine.
The end of 2016 saw good news for the UK’s Manufacturing industry, the FTSE 100 and pound sterling, giving hope to some that the new year will not bring the expected doom and gloom, but Brexit remains a dark cloud.
According to the Markit/CIPS Purchasing Managers’ Index (PMI), the manufacturing sector increased to 56.1 in December, compared to 53.6 the month before. Any figure above 50 indicates expansion for the sector and this is the highest level the Manufacturing Industry has hit for two and a half years. Such data also signals a quarterly pace growth of around 1.5% with the rates of production growth and new orders the best for over two years.
One of the main reasons for this growth has been the weaker pound following the Brexit vote last summer. This made goods manufactured in the UK much cheaper for overseas buyers, increasing the demand for such products and driving sales from countries around the world.
The weak pound has also caused the cost of imported products to rise for UK businesses and households, which has resulted in increased demand for products manufactured in the UK.
A robust FTSE 100
FTSE 100 investors have experienced a good start to 2017 as the stock market index closed at a record high for four days in a row. It finished 2016 with three record high closes in a row, rising above 7,000, and has continued where it left off at the start of 2017, with the weak pound, and growth in the manufacturing and house building sectors helping the index perform well.
However, Dean Popplewell, VP Market Analysis at Oanda, predicts that “future growth is expected to ease this year as accelerating inflation squeezes consumers’ wallets and uncertainty over the UK’s future ties to the EU should impede future business investment“.
The overall strength of the FTSE already hides a slump for much of the retail sector. Marks and Spencer, Next and AB Foods (who own Primark) all dropped to the end of the year and beginning of 2017.
Despite the pound dropping to record lows not seen since the mid-1980s during the summer months, it experienced something of a resurgence towards the end of 2016.
The first week of 2017 saw the pound strengthen against the dollar and euro, with which it had nearly reached parity. However, these gains were wiped out earlier this week after prime minister Theresa May made comments about pulling the UK out of the European single market, and the pound fell back to a ten week low.
The UK enters 2017 under a cloud uncertainty, more so than 12 months ago. Brexit will continue to have a big impact on what happens, with the government refusing to announce any plans for negotiations, leaving many to worry that such plans may not exist at all.
The expected slowdown in growth as inflation rises and starts to squeeze the public’s wallets will also start to impact the wider economy in the coming months.
There are some promising shoots for the UK at the start of 2017, but the larger arcs remain negative as Brexit begins to bite. Only time will tell whether the UK will be able to weather the storm that uncertainty brings.
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