Thursday 29 September 2016

Brexit fears loom large as Irish manufacturing growth stalls

Published 04/05/2016 | 02:30

Philip O'Sullivan is Chief Economist with Investec Ireland
Philip O'Sullivan is Chief Economist with Investec Ireland

Manufacturing growth in Ireland has slowed to a two and a half year low, with output, new orders and employment all posting weaker growth, while Brexit uncertainty drags down the sector in Britain.

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The sluggishness here is particularly acute in the crucial export sector, according to the latest Purchasing Managers' Index for the sector, with firms warning that there could be further volatility ahead of Britain's EU referendum in June.

The impending vote is having a particularly negative impact on the UK's manufacturing performance, with the sector unexpectedly shrinking to its lowest level in three years last month as factories not only struggle with the uncertainty of the vote, but also with a weaker global economy and a slowdown in the oil and gas industry.

It comes as separate figures from the European Commission showed that Eurozone economic growth overall will be slower than previously expected this year, with subdued inflation.

Philip O'Sullivan, economist with specialist bank Investec, said growth in the Irish manufacturing sector last month weakened to its slowest pace since November 2013.

"We think the second quarter is likely to prove to be a tricky period for many Irish manufacturing firms ahead of June's EU referendum in the UK (the destination for roughly one-seventh of Irish merchandise exports)," he said.

"In this regard, firms should give careful consideration to strategies designed to provide some protection in the event of further sharp moves in the currency and/or commodity markets."

The seasonally adjusted PMI for the sector dropped to 52.6 in April, from 54.9 the previous month. Although the reading signalled a further strengthening of manufacturing business conditions ( a reading above 50 signals expansion), the rate of improvement was the weakest in around two and a half years.

Growth of new orders eased sharply, and new export orders also rose at a slower pace, expanding only slightly.

Staffing levels increased, but the rise was the weakest so far this year.

Mr O'Sullivan said the fact that hiring is continuing, however, suggests companies feel the softness may not continue, providing some positive news.

But Goodbody Stockbrokers said the data suggested that Ireland was not immune to the slowing in the international economy.

"While the manufacturing sector continued to expand in April, the rate eased with weakness in new orders, particularly exports, being highlighted," said Goodbody economist Juliet Tennent.

"Further weakness in this sector is likely ahead of the Brexit referendum in the UK at the end of June."

In the UK, sterling fell after the Markit/CIPS manufacturing Purchasing Managers' Index fell to 49.2 from 50.7 in March, the first time since March 2013 it has fallen below the 50 mark that separates expansion from contraction.

"We expect that sentiment will continue to worsen in Q2 as the 23 June referendum on EU membership draws nearer as businesses become even more cautious with regard to hiring, spending decisions and investment," banking giant Barclays said.

Financial information firm Markit, which compiles the PMI data, said new orders in April matched February's three-year low and new export orders contracted for the fourth straight month as the global economy slowed.

The Bank of England has pointed to signs that uncertainty surrounding the EU referendum is curbing investment.

The pessimism was echoed in new data released by the European Commission, which showed Brussels has slashed its inflation forecast for the Eurozone and warned of slower-than-predicted growth across the bloc.

France, Spain and Italy, which have persistently failed to hit European Union budget targets, are still off track, the Brussels-based commission said yesterday.

Ireland, however, is forecast to be the fastest growing economy again this year, with the Commission predicting growth of 4.9pc.

Irish Independent

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