Pound plunges to five-year low on 'rubbish' UK manufacturing performance

Sterling plunged to a five-and-a-half year low against the US dollar on Tuesday, as the UK's manufacturing sector shrank unexpectedly.

Manufacturing production dropped by 0.4pc in November according to Office for National Statistics (ONS) data, compared to a 0.7pc fall in the wider industrial sector.

The fall in industrial output was worse than any of the 30 analysts polled by Reuters had anticipated. There figures were described by Michael Hewson, chief market analyst at CMC Markets, as "unambiguously rubbish".

Ruth Miller, an economist at Capital Economics, said that the figures followed “a dire performance” through much of last year, and indicated that there would be “no change in the manufacturing sector’s fortunes”.

Economists had been warning that the UK economy's growth, which had been leading the pack of G7 industrialised nations, was vulnerable to a slowdown. Weakness on the industrial side of the economy means that the dominant service sector has to do even more of the heavy lifting to support GDP growth.

Zach Witton, an economist at manufacturers’ organisation EEF, said that the report increased the chances “that industry ended 2015 in the red” after a challenging year for manufacturers.

Britain’s makers disappointed across all sectors; however, the ONS singled out production of pharmaceutical items as a particularly hard-hit area in November, with output in that area falling by 4.9pc.

Fears that the poor data would mean interest rates stay low for longer sent the pound down by nearly 0.8pc against the dollar, to $1.4352 - its lowest level since the summer of 2010.

Chris Williamson, chief economist at Markit, said: "Manufacturers are having a torrid time. Producers are having to deal with a toxic combination of a historically strong exchange rate, weak global demand, intensifying competition, notably from the US and continental Europe, as well as growing uncertainty about the outlook at home and abroad."

He argued that these factors were unlikely to recede soon, meaning that manufacturing would continue to struggle this year, leaving "the economy worryingly unbalanced".

Concerns that the UK economy will not be healthy enough to sustain an interest rate increase have risen after George Osborne, the Chancellor, warned that the country faced a “poisonous cocktail” of global risks.

2016 could mark the "beginning of a decline" for the UK unless vital work was done to cement the recovery, the Chancellor said last week, as he warned against the complacency of believing that the economy was fixed.

JP Morgan, one of the last big banks to believe that the Bank of England could raise its interest rates in the first half of this year, conceded that the manufacturing figures had forced it to rule out such a prospect.

The US bank pushed back its forecast for the first rate rise to November, as JP Morgan economist Malcolm Barr admitted that the factory output report was “the straw that breaks the camel’s back”.

He added that “recent disappointments in the pay data and the drop in oil prices had already put our call for the Monetary Policy Committee to raise rates in May at risk”.