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The UK economy has had a torrid time of late.
After the global recession caused by the meltdown of the banking sector, all industries took a hit and manufacturing was particularly affected. Banks essentially stopped lending, and when they don’t lend, business is stymied as it doesn’t have the funds to expand, re-tool or even just maintain equipment.
However, this last twelve months, things appear to have been turning around, and news in this week puts manufacturing output at a two-year high.
Of course, this year hasn’t been without its controversy and potentially economy-damaging decisions. The Brexit vote was a bombshell for the world’s markets, and nearly all economists expected there to be an immediate hit to all sectors.
However, even though manufacturing PMI (Purchasing Manager’s Index) dropped immediately after the vote to leave was announced, it has come back stronger than ever.
To make sense of it, you need to take into account the various forces at work in the economy, and although we won’t go into much detail here, it’s worth providing a quick summary.
Firstly, the FTSE has surged since the Brexit vote. This was a shock to many people because rather that investors leaving British stocks, it shows that they’re buying more than ever.
The index of leading shares, though, contains a lot of companies who have a lot of investment internationally, specifically, in many cases, with the USA. As the pound has weakened, this means they are on far more favourable terms and therefore they are more valuable.
But if that’s the case, why has the pound dropped so much? It’s traditionally been one of the strongest currencies in the world, why are people not investing in it?
Well, one of the reasons is that interest rates are just so low at the moment, with the potential to go lower. The Bank of England has held rates so low to encourage people to spend and hence boost the economy, however, with Brexit, if people are spooked, it might need more stimulus, and even lower rates.
Robert Plummer at the BBC explains:
“Weak economic data is casting doubt on the future performance of the UK economy, with inflation persistently well below the Bank of England’s 2% target and earnings growth slowing down from a six-year high.”
Put simply, our economy isn’t growing as much as people expect.
A cheaper pound means travelling abroad is more expensive for us Brits. You won’t get as many euros or dollars to the pound, so your holiday in the sun is going to cost you more, but there’s a very important upside to all this.
Firstly, people travelling to the UK will have a much cheaper time. Their money will suddenly buy a lot more, so they’re more likely to spend it, which is good for the UK’s tourist industry.
But, it also means that exports are cheaper for British manufacturers. If a company in the UK has a product that is bought by a company in the USA, there’s likely to be more demand for it.
And this is the effect we seem to be seeing now.
It also looks like the trend is good for Midlands manufacturers.
According to the Birmingham Post back in July, the region now has more than 14,200 manufacturers, up two percent on last year. It accounts for 14.5 percent of total manufacturing output, putting it well above the UK average.
So, even though confidence had dropped in the weeks and months following the Brexit vote, it seems the numbers, at least, show that manufacturing is actually riding the storm quite well.Back to blog