UK manufacturing starts 2017 on 32-month high

Posted on 1 Feb 2017 by Jonny Williamson

UK manufacturing output rose at the fastest rate since May 2014, according to the latest Markit/CIPS Purchasing Managers’ Index (PMI).

According to the figures, the robust rise in UK manufacturing output was underpinned by a solid increase in new order intakes, with an overall PMI score of 55.9 for January 2017.

That’s fractionally below December’s score of 56.1, but well above the neutral mark of 50.0 – something which has been maintained for six consecutive months.

New orders predominantly came from within the UK, boosted by a moderate lift in new export orders thanks to easing global market conditions and the continuing weak sterling exchange rate.

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On a more negative note, input cost inflation “surged” to a survey record high, note Markit/CIPS, compounded by output charges equally increasing at one of the highest rates recorded; reportedly down to a rising supplier prices.

Chief economist at EEF, Lee Hopley explained: “The data tells a familiar and positive story about the sector with the all the important output and orders components remaining firmly in positive territory.

“Rather than this being a case of the PMI defying gravity, the expansion in activity is being driven by more upbeat conditions at home and, demand in global markets on a more stable footing than businesses have seen for some time. Additionally, there’s some extra help from sterling’s depreciation.

“Of course every silver lining has a cloud and we know that is the return of inflation in 2017. With mounting evidence of pricing pressures across the industrial sector, the pass through to consumers is certainly on its way. This does present some risks to the resilience of the UK market later this year, in addition to the risks from further sharp swings in exchange rates and a shift in gears in global growth.”

Head of UK manufacturing at Lloyds Bank Commercial Bank, Dave Atkinson said: “Despite the slight drop in the reading since last month, manufacturers confidence remains close to the 30 month high. The result isn’t surprising given the cyclical nature of the sector and its strong links to the wider economy.

“Sentiment among businesses will no doubt have been buoyed by the release of the government’s Industrial Strategy green paper last week, which underlines the continuing and long-term importance of manufacturing to the UK economy.

“That said, firms will be cautious and keeping a close eye on costs. There will be challenges ahead as import prices continue to rise, affecting bottom line profitability, while the impact of some companies’ historical long-term currency hedging coming to an end may expose them to the devaluation of sterling that they have managed against to date.

“There is also the ongoing uncertainty over the future of the UK’s trading relationship with the EU and other key markets, but the sector will take heart from its resilience and agility during previous challenging periods as is indicated by the current rating which remains well above its long term average of 51.”

Mike Rigby, head of UK Manufacturing at Barclays, noted: “Today’s figures provide further evidence that manufacturers were quickly off the blocks in 2017 with strong growth in output and order books looking healthy, driven largely by domestic demand. Although the growing prospect of inflationary pressure looms large and the impact of Brexit continues to cause much uncertainty, it is encouraging to see that the manufacturing sector is just getting on with business as usual.”

Stephen Cooper, head of UK manufacturing at KPMG, commented: “[T]hese results also sound a note of caution and show evidence of the fastest rise in input costs for 25 years. Manufacturers have responded with an increase in selling prices, which may in turn begin to drive consumer price inflation. Continued high demand for raw materials is testing the capacity of some suppliers and is leading to shortages in certain inputs. As ever, manufacturers should ensure they practice good supply and operational planning, and have an awareness of their extended supply chain.”