Data this morning has revealed further encouraging news from
the UK economy. The figures show that manufacturing production grew by 3.2% in
July, while UK industrial production grew by 2.9%, which represents the
strongest monthly improvements in 10 and 25 years respectively. While we remain
in a double-dip recession, such improvements take on a greater importance and
should be celebrated.
Naturally though, the data on its own does not tell the
whole story, as July’s figures come on the back of an extremely weak performance
in June. Nonetheless, the figures far exceeded expectations and undeniably
point to a decent start to the second half of the year in those sectors.
There is no doubt that the UK manufacturers have plenty of
tough times ahead, with economic conditions in the eurozone deteriorating. Only
yesterday, the ECB downgraded its GDP forecasts. In June the bank saw eurozone
GDP for 2012 falling in a range of -0.5% to 0.3%, now its sees it falling somewhere
between -0.6% and -0.2%. The bank also foresees a significant risk of another economic
contraction in 2013.
In this environment, it is difficult to see UK manufacturing
and industrial production being a major driver of UK growth in the year ahead.
However, there are signs that the sectors can maintain a mild uptrend, which is
something to be thankful for. It could well help the UK bounce out of recession
in 2013.
This should dampen concerns surrounding the Organisation of
Economic Cooperation and Development’s latest prediction that the UK economy
will contract by -0.7% this year. Combined with the strong UK manufacturing and
services sector PMI’s for August, improvements in the labour market and retail
sales, Q3 looks to have started very well with the help of the London Olympics.
This is good news for sterling, as the Bank of England may well decide not introduce
any further QE when it next properly considers the option in November.
Richard Driver
Currency Analyst
Caxton FX
