UK factories pick up pace in February, but so do price pressures

LONDON (Reuters) - British manufacturers had their best month in two years in February but the post-Brexit vote fall in the value of the pound is making them push up their prices sharply, posing a challenge for 2017, an industry survey showed.

The Confederation for British Industry's monthly reading of the factory sector underscored how the decision to leave the European Union has so far failed to hurt the country's economy, confounding the forecasts of a quick, sharp hit to output.

The CBI said its total order book balance improved to +8 from +5 in January, well above its long-run average of -15 and better than a median forecast in a Reuters poll of economists for a fall to +3. [ECONGB]

The survey published on Monday added to other signs of a pickup in manufacturing on the back of Britain's strong economic growth in 2016 when British car production hit a 17-year high.

But the CBI's measure of how manufacturers expect to change their prices over the next three months rose further to hit its highest level since April 2011.

"Stronger demand and production is good news for UK manufacturers, though the weaker pound continues to push up input costs," CBI chief economist Rain Newton-Smith said. "This is now feeding through to output price inflation expectations."

Britain's manufacturing sector accounts for about 10 percent of the country's economy, dwarfed by its services sector. Supporters of Brexit have said the fall in the value of sterling could help rebalance the economy.

But factories were largely reliant on demand in Britain as more manufacturers reported export sales were below their normal level than above it, despite the weaker pound.

"It remains difficult to see how domestic demand will maintain its momentum when producers push through even bigger price rises," Samuel Tombs, an economist with Pantheon Macroeconomics, said.

"We continue to expect the manufacturing revival to lose considerable pace later this year."

The launch of Britain's formal divorce talks with the EU in the next few weeks may also hurt investment in the sector, given the uncertain outlook for the country's future ties with the bloc that buys almost half its exports.

Despite the recent pickup for factories, Britain's consumers, were mostly responsible for the economy's resilient response to the Brexit vote.

However, data published on Friday showed shoppers reined in their spending in January much more sharply than expected, as prices rose following the fall in the value of the pound, suggesting the expected slowdown in the economy this year could happen sooner than many forecasters think.

(Writing by William Schomberg, graphic by Andy Bruce; Editing by Toby Chopra)