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    UK manufacturing rebounds in January; pound firms

    UK industrial and manufacturing output rebounded in January following a slump towards the end of last year. Manufacturing output expanded for the first time in four months, jumping by a better-than-expected 0.7% month-on-month rate, against expectations of a 0.2% rate.

    Overall industrial production also posted positive growth after contracting by almost 2% in the prior two months combined. Total production output rose by 0.3% month-on-month in January, slightly below estimates of a 0.4% increase. On an annual basis, manufacturing output was 0.1% lower than a year ago while total production was up 0.2%.

    Sterling jumped after the data, climbing from 1.4183 dollars before the release to a high of 1.4240 dollars, before easing back slightly in mid-European session. The strong data helped the euro extend yesterday’s losses to a one-week low at around 0.77 pounds.

    During the month, manufacturing output was boosted by a 4.8% increase in the other manufacturing and repair sub-sector that includes furniture and installation of machinery. The worst performing manufacturing sub-sector was pharmaceuticals, which posted a decline of 5.9%.

    Outside of manufacturing, the biggest upward contribution to industrial output over the month came from the electricity and gas sub-sector, which rose by 4.3%. The water and waste management sector also had a strong month. But there was a 5.0% drop in mining and quarrying output, as bad weather conditions caused oil and gas extraction to plunge by 6.3%.

    Today’s strong data is likely to provide only a brief boost to the battered pound which has come under intense pressure over fears of the possible impact on the British economy of a UK exit from the European Union. It’s too early to say if the rebound in manufacturing will continue through to the following months. If February’s Markit PMI figures are any indication, manufacturing activity worsened last month. Additionally, weak growth elsewhere in the world makes the likelihood of a sustained recovery more uncertain.

    However, one positive outcome from the “Brexit” effect on the pound is that it makes UK produced goods and services more competitive with the rest of the world. Sterling’s appreciation in 2014-2015 was based on rising expectations of a soon-to-come Bank of England rate hike. But these expectations proved premature and the stronger pound hurt UK exports in the process. A weaker exchange rate should provide a much-needed relief to the manufacturing sector over the coming year.

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