Private DCN Private DCN - Sterling

UK industrial orders surprise to the downside

By Callum Holmes October 25th, 2016

A lot has been said of the weaker sterling of late and its effect on driving export-related growth in UK trade. However, the October CBI industrial orders released yesterday countered theory, in part, by falling sharply. The weaker currency did cause a rebound in export demand but a reduction in business optimism in the past few months pulled down domestic orders, with the balance posting a figure of -17 down from -5 in September. This suggests that the beneficial gains from exporters will not be enough to offset the decline in domestic demand.

This reading could be an early signal of the detrimental effect of sentiment and the effect it is having on the UK economy. Thursday sees the first release of the UK Gross Domestic Product (GDP) numbers, where the pace of growth in the economy is expected to decline from 0.7% to 0.3%. It will be interesting to see if the forecasted number is accurate.

Inflation effects could be felt sooner rather than later if we continue to see companies increase charges to the UK for overseas services. Microsoft will be increasing its prices to UK businesses that buy enterprise software or cloud services from the beginning of the New Year. Microsoft’s software prices will be rising by 13%, while  ‘most’ enterprise cloud prices in British pounds will increase by 22% to — in Microsoft’s words — ‘realign close to euro levels’. If we see others follow suit, the cost of inflation could soon be passed down to the consumer.

Today Bank of England (BoE) Governor Carney is due to testify on the economic consequences of the Brexit vote before the House of Lords Economic Affairs Committee. Given the circumstances the UK finds itself in, the market will be keeping an eagle eye on the developments within this testimony. As head of the central bank, he has more influence over the nation’s currency value than any other person as he is able to influence decision makers and signpost future policy action.