Britain’s manufacturing sector emerged from its longest decline since the financial crisis last month, after a boost from December’s election result, though weak European demand and Brexit concerns muted the optimism, a survey showed on Monday.

Business conditions in the UK manufacturing sector stabilised at the start of the year as political uncertainty declined and the domestic market strengthened, survey showed.

The IHS Markit/CIPS purchasing managers’ index (PMI) hits 9-month high in January following decisive election result.

The IHS Markit/CIPS purchasing managers’ index (PMI) rose to the no-change level of 50.0 from 47.5 in December, slightly stronger than an earlier “flash” reading for January of 49.8 which had shown the index just within contraction territory.

“Reduced levels of political uncertainty following the general election led to mild recoveries in new orders and business confidence and a stabilisation of production volumes,” IHS Markit said.

December’s reading was the second-lowest since 2012, and the manufacturing PMI had been below 50 since May, the longest such unbroken run since 2009.

Manufacturing makes up 10 per cent of the British economy, and the most recent official data showed the sector shrank by 2.0 per cent in the 12 months to the end of November.

January’s rebound matches other data since Prime Minister Boris Johnson won an unexpectedly big parliamentary majority in a Dec. 12 election, reducing short-run uncertainty over Brexit and the government’s political direction.

Bank of England Governor Mark Carney said last week that data in early 2020 had been good enough to keep the BoE from cutting interest rates after weakness in late 2019, but the survey numbers would need to be confirmed by official figures.

Past PMI surveys have sometimes overestimated the scale of upturns and downturns in the economy.

New orders grew overall at the fastest rate since April 2019, but export orders continued to decline, which manufacturers blamed on weak economies in mainland Europe.

After leaving the European Union at 2300 GMT on Jan. 31 following 47 years of membership, Johnson now has until the end of the year to negotiate a trade deal that will avoid new tariffs on British goods.

However, the car industry and other sectors which rely on just-in-time delivery worry that future border checks will make their British operations uncompetitive.

“Optimism remained low compared to the historical standards of the survey, in part due to ongoing uncertainty at some firms about the impact of Brexit,” IHS Markit said.

The BoE said some new trade frictions will be unavoidable, and estimates Britain’s sustainable annual growth rate over the coming years will fall to 1.1 per cent from an average of 1.6 per cent since the financial crisis.

Meanwhile the sterling fell sharply on Monday after Prime Minister Boris Johnson set out tough terms for European Union talks, rekindling fears Britain would reach the end of an 11-month transition period without agreeing a trade deal.

The sides have until the end of the year, when a standstill transitional period expires, to secure a deal on trade and future relations but Johnson is striking a tough tone, saying Britain will not adhere to the bloc’s rules and regulations.

The EU on the other hand has warned Britain that access to its single market of 450 million people will depend on how far London agrees to adhere to such rules on environmental and labour regulations.

“Sterling appears to be coming off on the not very encouraging signs from the two sides at the start of the negotiations. They are positioning themselves at two extremes,” said Adam Cole, chief currency strategist at RBC Capital Markets in London.

The moves came as risk appetite stabilised following big falls on Chinese markets, as Beijing took steps to shore up the economy hit by travel curbs and business shutdowns because of the coronavirus outbreak, including cutting interest rates.

By 0915 GMT the pound was down 0.8 per cent at $1.3105 while against the euro it had fallen 0.5 per cent to 84.43 pence.

It had ended January on a high, with the best weekly gain in a month after the Bank of England kept interest rates steady at 0.75 per cent, surprising some who had expected a 25 basis-point cut.

The dollar has also reversed some of its weakness from last week.

Reuters