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UK stock market hits record as manufacturers win business

Associated Press logo Associated Press 3/01/2017 By PAN PYLAS, Associated Press
FILE - In this Friday, June, 24, 2016 file photo, Buses pass the Bank of England, in the City of London. Britain's leading stock index has struck a record high as a closely monitored survey showed manufacturers in the country expanding at their highest tick in 30 months. By late-morning Tuesday, Jan. 3, 2017 the FTSE 100 index was up 0.3 percent at 7,165. Earlier in the session, it had breached the 7,200 mark for the first time ever, trading as high as 7,205.21. (AP Photo/Matt Dunham, File) © The Associated Press FILE - In this Friday, June, 24, 2016 file photo, Buses pass the Bank of England, in the City of London. Britain's leading stock index has struck a record high as a closely monitored survey showed manufacturers in the country expanding at their highest tick in 30 months. By late-morning Tuesday, Jan. 3, 2017 the FTSE 100 index was up 0.3 percent at 7,165. Earlier in the session, it had breached the 7,200 mark for the first time ever, trading as high as 7,205.21. (AP Photo/Matt Dunham, File)

LONDON — Britain's main stock index hit a record closing 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.

The FTSE 100 index ended the day 0.5 percent higher at 7,177.89, slightly down on its earlier all-time high of 7,205.21.

One of the main reasons why the FTSE 100 has rallied in recent 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.

The importance of the pound's fall to the FTSE 100 is evidenced in figures from research firm Capital Economics showing that the FTSE Local Index — which is made of British companies with at least 70 percent of sales from domestic customers — fell 7 percent during 2016. By contrast, the FTSE 100 rose 14.4 percent.

A survey released Tuesday confirmed how the pound's fall has been positive for some in the economy.

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.

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