(Bloomberg) -- U.K. manufacturing unexpectedly cooled for a third month in March and may weaken further, according to IHS Markit, which repeated its warning about inflationary pressures.
Its factory Purchasing Managers Index declined to 54.2 from 54.5 in February, above the key 50 level that divides expansion from contraction, but below economists' expectations for an uptick to 55. A measure of new orders also weakened.
The factory survey compared “favorably” to its long-run trend, according to Markit, with the slowdown centered on consumer-goods producers. While manufacturing probably made a “solid contribution” to first-quarter economic growth, there's been a definite loss of momentum. That weaker trend is likely to continue into the second quarter, Markit senior economist Rob Dobson said.
In March, the weaker pound helped export competitiveness and firms' confidence remained high. Bank of England Deputy Governor Ben Broadbent said last month that exporters are enjoying a post-referendum, pre-Brexit “sweet spot” because while sterling has fallen, EU trading arrangements remain in place.
That may slowly change after U.K. Prime Minister Theresa May kickstarted the formal process of withdrawing from the EU last week, nine months after the vote to leave.
“Whilst the near-term outlook for manufacturing looks encouraging, it's possible that Brexit uncertainty will start to weigh more heavily on sentiment,” said ING economist James Smith. “Given the fairly contrasting negotiation strategies outlined by U.K. and European leaders last week, the risk of reduced or altered access to European markets may begin to feel more real.”
That means that as much as the currency's depreciation since the June referendum is helping exporters, there may not be a big enough boost to the overall economy to offset an expected slowdown in consumer spending.
The pound's impact on inflation also remains an issue for companies, with elevated price pressures in March, according to Markit. A measure of output prices edged back toward the near-record high seen in January.
“The fall in the value of the pound post-Brexit is helping new orders,” said Smith. “But that currency effect comes at a price.”
--With assistance from Mark Evans and Andre Tartar
To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net.
To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Brian Swint
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