Strong pound confounds efforts to rebalance UK economy

Rob Dobson, chief ecomomist at financial information firm Markit, called on the new Government to revive the manufacturing sector, encourage business investment and boost export competitiveness.

He made the comments as latest figures showed Britain’s factories increased production again in May, extending the current sequence of expansion to 27 months, according to the latest survey of purchasing managers.

Although the rate of output growth edged lower, the extent of the easing was only minor and much less severe than April’s steep slowdown, said survey compiler Markit.

Mr Dobson said: “Expectations of a broad rebound in UK economic growth during the second quarter of the year are called into question by these readings.

“Manufacturing looks on course to act as a minor drag on the economy, as the sector is hit by a combination of the strong pound and weak business investment spending.

“The strength of sterling is serving a double-whammy for economic growth by constraining manufacturer’s export

performance and also driving a surge in cheap imports.

“Where growth is being reported by manufacturers, this remains heavily dependent on the domestic market, and consumer demand in particular.

“The challenge therefore remains for the new Government to take the necessary steps to revive manufacturing, boost investment spending and improve export competitiveness if any headway is to be made on achieving the long-promised

rebalancing of the UK economy.

“Manufacturing’s growth funk is also hurting job creation, with increases to payroll numbers easing to a near standstill in May.

“However, on the price front, the news was better for those hoping deflation may prove short-lived, as manufacturers raised their selling prices for the first time in five months.

“However, the victory may prove pyrrhic if this ultimately constrains consumer demand and removes the main prop underpinning the economic recovery.”

Markit said the UK manufacturing sector saw further modest expansions of both output and new orders in May,

as a solid domestic market continued to offset lacklustre demand from overseas.

The consumer goods sector remained the stand-out performer, while investment goods producers fared better than in April, it added.