Changes in Britain's manufacturing model could mute risk from rise in pound

By Ana Nicolaci da Costa LONDON (Reuters) - Britain's economy is likely to weather the year-long rise in the pound even if some policymakers are worried that a further strengthening of the currency could hurt exports and frustrate a more sustainable recovery. Sterling has jumped by about 10 percent against a basket of currencies since a trough in early March last year, pushed up by Britain's economy staging a much faster-than-expected recovery in 2013. That made the pound the strongest performer among the world's most-actively traded currencies. But just as sterling's more than 25 percent plunge between 2007 and 2009 provided no clear boost to exports, economists say the pound's recent rise may not take too much of a toll on the volume of goods and services Britain sells abroad. It is because even though a stronger currency makes exports dearer, it cheapens imports, on which manufacturers are increasingly reliant. In the early 1990s, 90 percent of the different sectors that comprised UK manufacturing had at least 60 percent of their finished products fully sourced at home. Now, fewer than half get all their inputs in Britain, said Neville Hill, chief European economist at Credit Suisse. "The traditional ways we think about foreign exchange moves and their impact on the economy are fairly outdated given the industrial structure of most of the economies we now look at." British policymakers want the country to export more to narrow its trade deficit and make the economy less dependent on consumer spending. But the dependence of many manufacturers on foreign parts and raw material for their finished products may complicate that push. "The long-term reallocation of resources to export markets is hindered by the high level of imports in the supply chain," said Richard Woolhouse, chief economist at British Bankers' Association (BBA). INSULATION Rob Threapleton, managing director of Northern Engineering, which makes sealing technologies for clients in aerospace, defence and pharmaceuticals, said his firm exports 85 percent of its 10 million pounds in annual sales. It also buys 50 percent of its raw materials, such as rubber, silicon and other advanced materials from Western Europe. The rest comes from Britain. "I just need to keep my costs (down) by buying my raw materials from overseas, because if I am buying my raw materials (that way) I can offset that exchange rate risk," he said. Threapleton said his products are so niche they cannot be easily replaced by foreign ones - the kind of specialised manufacturing economists say is becoming more common and is helping to protect British trade from currency fluctuations. Bigger companies are also specialising more in high-value products, reducing their exposure to currency risks. "For example, where the UK is doing quite well is in things like cars where the UK product mix on automobiles is quite distinct," David Tinsley, economist at BNP Paribas said. "It tends to be quite high premium brand stuff these days compared to how it used to be when it was more mass market." Cars were Britain's third-biggest goods export and also Britain's fourth-biggest import in 2013. The importance of the services sector could also explain why British trade is less susceptible to currency moves. Services such as banking and insurance are less price sensitive than manufactured goods because they are harder to replicate. Between 1998 and 2013, services rose from 30 percent of Britain's exports to over 40 percent and manufactured products fell from 64 percent to 52 percent, official statistics show. "The UK economy has managed to position itself into certain segments like professional and legal services, automotive design and education - we have got a number of niches which are really good and where prices are not the decisive factor," BBA's Woolhouse added. (Reporting by Ana Nicolaci da Costa; Graphics by Vincent Flasseur; editing by William Schomberg/Jeremy Gaunt)