UK manufacturing ends 2016 on 30-month high

Posted on 3 Jan 2017 by Jonny Williamson

Bolstered by a boost to both output and new orders, purchasing activity within UK manufacturing defied expectations of modest growth with the highest recorded score for two and a half years, according to the latest Markit/CIPS Purchasing Manager’s Index (PMI).

Following on from November’s score of 53.6, the UK manufacturing PMI in December rose to 56.1 – the best seen over the past two and a half years and well above the long-run average of 51.5 (a score above the neutral mark of 50.0 indicates growth).

Businesses benefitted from an influx of new work from both domestic and overseas clients, the latter aided by the benefits offered by the depreciation of sterling. Output grew to match the rise in input, with growth of production and new business registered across most sectors. However, the PMI indicated that the increase seen by consumer goods producers was “relatively mild in comparison.”

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Encouragingly, new export orders rose for the seventh consecutive month in December – achieving the second-highest rate of growth since early-2014. Globally widespread, orders arrived from the US; Europe; China; Middle East; India, and other Asian markets.

Though there is a concern that higher new business could lead to a similar increase in backlogs of work, something that could become apparent as early as the first PMI of 2017.

Employment rose for the fifth successive month in December, with the pace of jobs growth reportedly accelerating to the fastest in 14 months. SMEs experienced the highest staffing growth, although large companies also recorded a “moderate increase”.

Senior economist at survey compiler, IHS Markit, Rob Dobson commented: “The UK manufacturing sector starts 2017 on a strong footing… Based on its historical relationship against official manufacturing data, the survey is signalling a quarterly pace of growth approaching 1.5%, a surprisingly robust pace given the lacklustre start to the year and the uncertainty surrounding the EU referendum.”

“The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround, while the domestic market has remained a strong contributor to new business wins. A plus point from the December survey was that the expansion was led by the investment and intermediate goods sectors, suggesting capital spending and corporate demand took the reins from the consumer in driving industrial growth forward.”

Despite UK manufacturing finishing the year strongly with increased output and growing order books, head of manufacturing at Barclays, Mike Rigby noted, “As resilient as the sector has proved to be over the years, weaker sterling is making imports more expensive, feeding inflationary pressures which will inevitably impact domestic output.

“To keep the momentum going, what we need to see now is manufacturers realising more of the investment decisions that were put on hold in 2016.”

EEF economist, Martyn Jenkins warned: “Input prices remained elevated in December, albeit slowing from Octobers 69 month high. It is only a matter of time before these rising input prices are passed onto the consumer and with it the negative effects on consumer’s purchasing power. This will be of great concern to manufacturers heading into 2017.”