Britain's main stock index struck a record high Tuesday as a survey showed manufacturers gaining business from the slide in the value of the pound since the country's decision in June to leave the European Union.
In early-afternoon trading, the FTSE 100 index was up 0.5 percent at 7,182. Though the index is down slightly from its earlier all-time high of 7,205.21, it remains on course to better the previous record closing high of 7,142.83.
One of the main reasons why the FTSE 100 has hit a series of highs over the past few months relates to the near 20 percent fall in the value of the pound across an array of currencies since June's “Brexit” decision. On the eve of the vote, the pound was trading as high as $1.50. Now it's around $1.23.
A weaker pound can help exporters win business abroad and paradoxically boosts the earnings of many companies listed on the FTSE 100 that make the bulk of their revenue in other currencies. They include oil giants BP and Shell, mining firms Anglo American and BHP Billiton, and Europe's largest bank, HSBC.
Another survey released Tuesday confirmed the boon provided by the pound's fall.
The monthly survey of manufacturers from financial information company IHS Markit and the Chartered Institute of Procurement & Supply showed the sector enjoying a strong rise in new business in December. The so-called purchasing managers' index - a broad gauge of business activity - rose to a two-and-a-half year high 56.1 points in December from the previous month's 53.6.
The survey shows output expanded to meet the higher inflows of new work. The growth rates in output and new orders were among the fastest seen during the survey's 25-year history.
“The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround, while the domestic market has remained a strong contributor to new business wins,” said Rob Dobson, Senior Economist at IHS Markit.
The British economy has fared better since the Brexit vote than many forecasters had predicted. Instead of falling into recession as many had expected, it continued to grow. That was again largely due to the export-boosting fall in the pound as well as further stimulus measures from the Bank of England, including a cut in its main interest rate to a record low of 0.25 percent.
Though manufacturing is improving, the consensus is that the British economy as a whole will falter this year as the uncertainty surrounding Brexit ratchets up. Prime Minister Theresa May has indicated that she will trigger the two-year process by which Britain leaves the EU by the end of March. That move is expected to undermine British economic activity as businesses and individuals delay or scrap investment and spending amid the uncertainty.
One negative aspect stemming from the fall in the pound is that it raises the prospect of higher inflation by making import costs more expensive, which could undermine business and consumer spending. Tuesday's survey also confirmed that trend: rates of inflation for input costs - things like raw materials and energy - and output charges both remained elevated in December, albeit down slightly from October's highs.
“The impact of rising input costs continued to be felt, as the rate of cost inflation stood at one of the highest in the survey's 25-year history,” said David Noble, Group CEO at the Chartered Institute of Procurement & Supply.
