Manufacturing sector hit by strong pound and worries over China


Employment in the manufacturing sector fell for the first time in more than two years last month as the sector was held back by sustained export weakness - with China's slowdown likely to add a further headache.

The closely-watched CIPS/Markit purchasing managers' index (PMI) survey posted a reading of 51.5 in August - where 50 separates growth from contraction. This was down from 51.9 in July.

A reading for employment growth turned negative for the first time in 26 months as larger manufacturers made cutbacks, though small businesses continued to add staff.

Exports fell for the fifth month in a row, blamed on the strength of the pound, weak sales in the eurozone and the slowdown in China.

Domestic business kept the sector going, with consumer goods remaining a source of strength - though there was ongoing weakness in those sorts of goods used by firms to make other products.

Manufacturing has been growing for two and a half years according to monthly PMI data, but August's reading was well below the average pace over that period.

Sterling fell by a cent against the euro.

Rob Dobson, senior economist at survey compilers Markit, said: "The sector looks unlikely to make much of a contribution to the solid gain in broader GDP growth expected for the third quarter."

He said the impact of China's slowdown was likely to be minimal since it only makes up a small proportion of UK overseas sales.

"However, it is too early to say what the indirect impact may be if there is any knock-on effect for broader global economic growth," Mr Dobson added.

Howard Archer, chief UK and European economist at IHS Global Insight, said the survey would fuel suspicions of a weak third quarter for manufacturing after it contracted by 0.3% over the April-June period.

He added: "Lacklustre manufacturing activity is worrying for hopes that UK growth can become more balanced and less dependent on the services sector and consumer spending.

"On the export front, manufacturers will be concerned about the ongoing strength of sterling against the euro, and they will also be worried that global growth could be held back by a marked slowdown in China."

The figures come after latest official data last week showed trade was the biggest positive contribution to UK gross domestic product (GDP) in the second quarter.

Samuel Tombs, of Capital Economics, said the strong pound was "crimping exporters" and the report suggested "that the major support net trade provided to GDP growth in the second quarter will be a blip".

He added: "Sterling's appreciation and the continued sluggishness of the eurozone economy's recovery suggest that a sustained revival in the export-orientated manufacturing sector will remain a distant prospect."

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