UK manufacturing looks to end 2016 on a high

Industrial Strategy Sparks Grinding Industry Manufacturing UK Manufacturers Stock Image Pixbay
The positive effect of depreciation on sterling was a primary factor in October’s score.

The UK manufacturing sector has started the final quarter of the year strongly, with upturns in output, new orders and employment, according to the latest Markit/CIPS Purchasing Managers’ Index (PMI).

A score of 54.3 for October, slightly down from September’s 55.5, shows UK manufacturing is still combating rising input costs due to the weaker exchange; however, the score remains well above the long-term average of 51.5.

According to Markit/CIPS, new order volumes increased for the third consecutive month and “at a pace close to September’s recent high”, with companies reporting higher demand “from both domestic and export clients.”

The positive effect of depreciation on sterling was a primary factor in October’s score, helping manufacturers to raise inflows of new export business, particularly from the US, the EU and China.

In turn, however, there was a negative effect, with the exchange rate devaluation causing higher import prices and costs of products based on dollar-dominated commodities, i.e. oil.

Lee Hopley, chief economist, EEF.
Lee Hopley, chief economist, EEF.

Chief economist at EEF, Lee Hopley explained: “Manufacturing indicators have stabilised following the sharp movements seen in the weeks after the referendum with production levels and new order in-take across the sector continue to expand at a reasonably healthy clip.

“However, the main influence on the numbers appears to be the exchange rate, and the pros and cons for Sterling’s collapse are becoming increasingly apparent.

“The weaker pound is supporting improving demand from export customers, but price rises from higher import costs are becoming more significant and will be felt in consumer’s pockets sooner rather than later.

“If any MPC members were on the fence about interest rate moves this month, this latest survey would argue against any further cuts right now.”

Head of manufacturing at Lloyds Bank Commercial Banking, Dave Atkinson commented: “Manufacturing activity remains at its highest level since January, and the fact that firms have maintained a positive outlook amid an uncertain landscape and a devalued pound is something to be applauded.

“It’s a result that is once again testament to the agility, determination and flexibility of businesses throughout the sector, and reflects an encouraging level of resilience.

“One note of caution surrounds the possibility that, in some cases, export growth is coming from short-term partnerships driven by the weaker pound. Firms taking advantage of the exchange rate now will have to work hard to build long-term relationships to sustain export growth.”

Mike Rigby, head of manufacturing, transport and logistics, Barclays.
Mike Rigby, head of manufacturing, transport and logistics, Barclays.

Head of manufacturing at Barclays, Mike Rigby noted: “Today’s figures appear to offer further evidence that UK manufacturers have taken the Brexit vote in their stride and are carrying on with business as usual, at least in the short-term.

“Encouragingly, new orders continue to rise and exporters are taking good advantage of a weaker sterling.

“That said, on the flip side, rising input costs are inevitably starting to feed in, squeezing profit margins which in turn could impact further on levels of inflation sooner than previously anticipated.”