By Wiktor Szary

LONDON--U. K. manufacturing expanded at the fastest pace in 2 1/2 years in December, a survey showed Tuesday, as both domestic and overseas demand grew robustly, the latter boosted by sterling's sharp weakening in the wake of the Brexit vote in June.

The purchasing managers index for the British manufacturing sector rose to 56.1 in December, the highest reading since June 2014, financial information firm IHS Markit Ltd. said. This was significantly above the previous month's revised reading of 53.6 and well above the 53.5 forecast by analysts polled by The Wall Street Journal.

Production and new business grew, with new export business rising for the seventh consecutive month, as companies reported increased demand from the U.S., Europe, China, the Middle East and Asian markets.

"The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround," said Rob Dobson, senior economist at IHS Markit.

Since June 23, when 52% of Britons voted to leave the European Union, the pound has weakened by around 15% against the dollar and by around 10% against the currencies of the U.K.'s major trading partners

The strong reading may help soothe concerns about manufacturing's performance in the fourth quarter, as the ruling Conservatives prepare to launch exit negotiations with Brussels. Prime Minister Theresa May has said she would formally notify the EU of the U.K.'s decision by the end of March, beginning exit talks expected to last at least two years.

Some economists caution that strong PMI readings don't always translate into actual growth. Official data showed that factory output dropped by 0.9% on the month in October, confounding analysts expectations for moderate growth. Figures for November are due to be published later in January.

"The relationship between the PMI and the official data...has been particularly loose lately; the PMI has signaled steady growth in manufacturing output since August, but the official data have oscillated around a flat trend," Samuel Tombs, chief U.K. Economist at Pantheon Macroeconomics in London, said.

The weakened pound is likely to prove a mixed blessing for the economy. Increases in input costs and output charges remain near the highest seen in the survey's history, IHS Markit said, meaning British consumers are likely to have their incomes squeezed as price growth accelerates.

Annual inflation accelerated to a two-year high of 1.2% in November from 0.9% a month earlier, official data showed. The Bank of England predicts that inflation will exceed its 2% goal by the middle of 2017, but central bank officials have said they would prefer a short spell of above-target price-growth to pushing up unemployment by raising interest rates.

Write to Wiktor Szary at Wiktor.Szary@wsj.com

(END) Dow Jones Newswires

January 03, 2017 06:57 ET (11:57 GMT)

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