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Pound under pressure again as UK production posts surprise drop in November

Manufacturing output in the UK fell for the second month in a row in November, while overall industrial production was hit by falling energy output due to mild weather conditions.  The British pound dropped below 1.45 dollars after the data as today’s numbers add to the increasingly bearish sentiment for the UK currency.

Manufacturing production was down by 0.4% month-on-month in November, matching October’s decline. Consensus estimates were for manufacturing output to expand by 0.1%. On an annual basis, output was 1.2% lower than 12 months ago – the biggest annual drop since May 2013. A 4.9% fall in pharmaceutical production was to blame for the monthly decline.

Industrial output also missed expectations by a large margin, contracting by 0.7% month-on-month in November, versus estimates of no change. However, compared to a year ago, industrial production stood 0.9% higher than in November 2014. Apart from manufacturing, lower output from mining & quarrying (-1.6%) and electricity & gas (-1.8%) also dragged on monthly industrial growth.

Manufacturing activity has weakened since the second half of 2015 as slowing overseas demand and a stronger pound have hit UK exports. This contrasts with robust domestic demand, which has been driving UK growth. However, rising incomes and strong consumer spending have yet to create any inflationary pressures in the UK economy. Combining this with falling energy prices and uncertain outlook for global growth, the Bank of England recently revised its outlook for UK growth and inflation, pushing back market expectations of an increase in interest rates to early 2017.

The market’s adjustment to the latest interest rate expectations has driven the pound lower against other currencies since November. This may provide some boost to UK exports in 2016 but output still has some way to go before reaching pre-crisis levels. Manufacturing output stood 9.1% below pre-recession levels in the three months to November, while industrial production fared only marginally better at 6.1% below its peak. This highlights the challenge the UK faces in 2016 in reviving its struggling manufacturing sector and reducing its burgeoning current account deficit. An excessive current account deficit is one of the risks for sterling over the next 12 months.

The pound hit a 5½-low of 1.4435 against the dollar soon after the disappointing data, extending its slide since the start of the year. It also fell sharply against the euro with the single currency sharply reversing yesterday’s losses to stand at 0.7517 pounds in mid-European trading.

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