Manufacturing PMI picks up speed for first time in six months

Posted on 1 Jun 2018 by Jonny Williamson

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose to 54.4, up slightly from April’s 17-month low of 53.9, to signal growth for the 22nd straight month.

The company has introduced a holistic approach to design and manufacturing systems in the auto industry - image courtesy of Nexteer Automotive.
The PMI shows that UK manufacturers maintained a broadly positive outlook for the sector in May – image courtesy of Nexteer Automotive.

Although growth of production accelerated to its best during the year-so-far, this was mainly achieved through the steepest build-up of finished goods inventories in the 26-year survey history and a sharp reduction in backlogs of work.

Growth of incoming new business remained solid in May, but the pace of expansion eased to an 11-month low. The slower trend reflected a softer increase in new work from the domestic market, as inflows of new business from overseas strengthened slightly.

Companies reported growth of new work from mainland Europe, North America, China, India, South America and Africa.

According to the PMI, the pace of job creation in the manufacturing sector also lost momentum in May. Employment rose only marginally, with the pace of increase the lowest in 15 months. Higher staffing levels at intermediate and investment goods producers were partially offset by job losses at consumer goods producers.

Reportedly, UK manufacturers also faced rising cost inflation and supply-chain pressures during May. The rate of increase in average input prices accelerated for the first time since January, with companies reporting that general raw material cost increases were being exacerbated by shortages developing for a number of inputs.

Average vendor lead times – a bellwether of supply-side constraints – deteriorated to the greatest extent during 2018.

According to the PMI, manufacturers maintained sufficient pricing power to pass on part of the increase in costs. May saw output charges rise for the twenty-fifth successive month, with solid increases across the consumer, intermediate and investment goods sectors.

That said, the rate of selling price inflation eased to its weakest since last August. UK manufacturers maintained a broadly positive outlook for the sector in May, with almost 52% of companies forecasting that production would rise over the coming year.

That compared favourably to less than 6% that anticipate a contraction. Optimism was attributed to rising order intakes, growth in export markets, new product launches and planned company expansions. That said, the overall degree of positive sentiment dipped to a six-month low.

The latest comments: 

Dave Atkinson, UK head of manufacturing at Lloyds Bank Commercial Banking, said:  “Despite a downbeat PMI, manufacturing remains the best-performing component of the wider UK economy. It is the sector whose fortunes are most closely tied to global economic growth, which is holding up well and insulates exporting manufacturers from the peaks and troughs of an uncertain UK economy.

“It is far from plain sailing, though, and there is undoubtedly some weakness in the sector. In recent weeks a series of headwinds has challenged the industry. These include the spectre of an interest rate rise later in the year – which could inhibit investment – currency fluctuations and fears of potential trade wars between key exporting markets.

“In an environment of volatility, firms are being vigilant and spreading risk wherever they can, for example by selling more of their goods abroad.”

Mike Rigby, head of Manufacturing at Barclays, said: “As welcome as any uptick in manufacturing output growth is, today’s figures do reveal a slowdown in new business and inflationary pressure beginning to raise its head again.

“Such data, along with other current performance indicators, will give the Bank of England more food for thought as it ponders the timing of its next base rate move.

“What manufacturers could really do with now is some degree of clarity over the future relationship with the EU as the continuing uncertainty over Brexit negotiations can’t be helping them with their investment intentions.

“For now, the sector needs to remain flexible in its planning as it negotiates the uncertain market conditions.”