UK manufacturing growth surges forward

Posted on 4 Sep 2017 by Jonny Williamson

The pace of growth within UK manufacturing accelerated again in August, thanks to strong intakes of new work received, according to the latest Markit/CIPS Purchasing Managers’ Index.

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Production rose at the steepest pace in seven months, underpinned by faster intakes of new work received. Moreover, rates of expansion in both variables were among the best registered since mid-2014.

August’s headline UK manufacturing Purchasing Managers’ Index (PMI) was 56.9 – up from July’s 55.3 and the second highest level in more than three years.

All five of the PMI components – output, new orders, employment, suppliers’ delivery times and stocks of purchases – were reportedly consistent with a stronger performance for UK manufacturing during August.

Production rose at the steepest pace in seven months, underpinned by faster intakes of new work received. Moreover, rates of expansion in both variables were among the best registered since mid-2014.

The domestic market was cited as the prime source of new contract wins, while the trend in new export business also remained strong. Although the rate of improvement in foreign demand eased from July’s near-record high, it remained among the strongest seen since new export orders data were first collected in January 1996.

Companies linked gains in new export work to increased business from mainland Europe, the US, China and Australia. The historical weakness of the sterling exchange rate was also reported to have boosted export competitiveness.

Job creation was recorded for the thirteenth straight month, with the rate of increase the quickest since June 2014. However, purchase price inflation accelerated for the first time in seven months during August – albeit, well below the record high seen at the start of the year.

Almost 31% of companies reported an increase in purchase prices, which they generally linked to the rising cost of commodities. Some noted that purchase price pressures had been exacerbated by shortages developing for certain key inputs. Supply-side constraints were also reflected in the trend in vendor lead times. Manufacturers’ selling prices rose at a solid, yet slower, pace.

Business optimism improved to a three-month high in August. Positive sentiment was attributed to rising demand, new product launches, efforts to improve market share and expand into new markets, a stronger global economy and planned investment spending. Over half of companies expect output to be higher in one year’s time, compared to less than 7% that forecast a decline.

Chief Economist at EEF, Lee Hopley commented: “UK manufacturers are looking beyond the Brexit negotiations to strengthening market opportunities in Europe and beyond, with the acceleration in manufacturing activity in August helping to provide some welcome offset to sluggish consumer demand at home.

“With the eurozone PMI hovering at a 74-month high and sterling hitting eight-year lows last month, the buoyant demand picture seen across manufacturing supply chains is not surprising. As companies are translating these buoyant trading conditions into more jobs and increased investment plans, it seems that confidence levels are a far cry from levels reported a year ago.

“However, inflationary pressures from recent exchange rate movements and shortages of some inputs aren’t quite beyond us yet, something the Bank of England will be paying close attention to. The raft of decent survey data from the sector suggest manufacturing output growth should look better in the second half of this year than it did in the first, but longer term the continued robustness of demand in the rest of the world and the right investment decisions at home to capitalise on it will be key to sustaining this picture.”

Head of manufacturing at Barclays, Mike Rigby commented: “UK manufacturing continues to register encouraging levels of growth across all measures. However, the benefits of a weak sterling and an improving global economy, as well as the continuing support from domestic demand, won’t necessarily have the desired effect unless the sector invests more to improve efficiency and beef up capacity.

“With Brexit negotiations now a reality, uncertainty around what any deal will look like will continue to hinder investment intentions but manufacturers have proved time after time that they are good at getting on with business.”

UK head of manufacturing at Lloyds Bank Commercial Banking, Dave Atkinson noted: “There have been some ominous signs recently for manufacturers, so many in the sector will be relieved to see a upbeat PMI reading.

“Data during the month showed that the UK’s trade deficit has widened and that we are becoming more, not less, reliant on exporting to the EU. Add to that the fact that the pound remains weak versus major currencies, making imports pricier, along with uncertainty over future trade deals and the result is some underlying nervousness among manufacturers.

“Against this background, businesses are paying close attention to their working capital as they look to manage and mitigate these risks. Sterling’s weakness has created some accidental exporters who are finding their goods more competitive overseas and sub-sectors like food and drink and aerospace are performing strongly.

“There are many challenges facing those seeking to grow, so savvier firms are focusing on productivity to boost margins. Many are cash-rich and recognise that now is the right time to invest so the UK isn’t left behind in the new world of smart manufacturing.”