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Performance in the manufacturing sector of the UK has hit its weakest in two years last month as the country experienced its first contraction in export orders since 2016 and as the approach of Brexit weighed on the industry.  

Data from a London-based research firm showed UK’s manufacturing purchasing manager’s index (PMI) dropped to 52.8 in August which was its lowest level in the last 25 months. Analysts had expected PMI to grow from 53.8 in July to 53.9 in August.

The result suggested that the manufacturing division, which already suffered losses in output during the first two quarters of the year, could continue to fall for the rest of 2018.    

Since the referendum vote to exit the European Union in June 2016, strong global demand and relative weakness in the pound have supported Britain’s manufacturing segment even as losses in real incomes reined back UK consumers’ spending power.

Director of the research firm, Rob Dobson, stated that the latest PMI report is broadly consistent with zero growth in manufacturing production, meaning the division will likely be unable to help the wider UK economy in the third quarter. The manufacturing sector represents about 10 percent of UK’s economy.

Although slower growth of domestic demand contributed to the decline in manufacturing activity, the main constraint was the trend in new export business, according to Dobson.

Contraction in Export Orders

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Weakness in the activity of UK factories came as new export orders post losses for the first time since April 2016.

Some companies and survey respondents pointed to the recent growth slowdown in the world economy as the cause of lower inflows of the new work from abroad.

Britain’s manufacturers face a difficult period as the Brexit deadline draws near and US President Donald Trump’s trade sanctions hit exports.

Analysts also believed the sector’s situation will worsen over the coming months as Brexit uncertainty and the impact of the tit-for-tat trade sanctions prompted by Trump’s steel tariffs start to take effect further.

Economist Andrew Wishart said the contraction in export orders indicated the possibility of a no-deal exit from the EU in March and a moderation in global expansion is beginning to put more pressure on the sector.

Overall, while the survey does not signal for a continuous contraction in the manufacturing industry in the third quarter, there is little sign of a strong rebound, Wishart added.

Brexit Uncertainty

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Manufacturers’ confidence for the outlook for the year to come retreated to a 22-month low as much uncertainty still surrounds the final outcome of the Brexit talks.

The lack of clarity over the terms has left the progress of Britain’s departure from the EU on an unsteady path. EU’s chief Brexit negotiator Michel Barnier has stated that he is strongly against British Prime Minister Theresa May’s proposals for a future trade deal.

Barnier’s comments added to concerns over the possibility of a no Brexit deal.

May has vowed not to make any compromises with her Chequers agreement that are not in the national interest and cautioned that she will not give in to those requiring for a second referendum on the withdrawal accord.     

The Chequers agreement would acknowledge the UK favoring a common rulebook with the EU for trading in goods, so as to keep a frictionless trade at the border.

Critics however, see the UK being tied to EU rules due to May’s proposed deal, thus keeping Britain from establishing its own trade deals in years ahead.

The UK is due to leave the EU on March 29 although it has yet to agree how its concluding relationship with the union will go. Talks between the two have an unofficial October deadline, but the EU suggested negotiations could be extended to November.

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