A rise in manufacturing activity in the UK in December helped to offset any negative impact on sterling caused by the rise in VAT this morning.
According to Markit and the Chartered Institute of Purchasing and Supply (CIPS), the UK manufacturing index grew at its fastest pace since December 1994, rising to 58.3 from 57.5 in November and defying economists surveyed by Bloomberg, who had expected a slight fall to 57.2. Markit said that weakness in sterling had helped British exports, and the CIPS added that the figures augured well for a continuation of the manufacturing-led recovery in 2011. Also aiding sterling’s rise against the US dollar was an unexpected rise in mortgage approvals in November. Data from the Bank of England showed that the number of approved home loans hit its highest level since July. 48,019 loans were given the go-ahead, with the data following on from last week’s surprisingly resilient house price survey. However, UBS cautioned that the improvement, although welcome, was from very low levels, and that there was still much room for progress in the mortgage market.
As the January sales continue, investors will keenly await updates from retailers about the state of sales over Christmas. Stronger-than-expected figures will suggest continued strength in UK consumer spending, although this is likely to have been distorted by purchases made in advance of today’s VAT rise. If reports for the next two months show disappointing sales, then sterling could weaken as investors worry about the UK economic recovery in the year of austerity.