Inflation hits but UK manufacturing continues strong start to 2017

The performance of the UK manufacturing sector remained solid at the end of the first quarter, although rates of expansion in output and new orders lost further impetus following recent highs, remaining above respective long-run averages, with domestic markets a key source of new business wins.

The boost to export competitiveness from the weak sterling exchange rate also contributed to new work inflows, according to the seasonally adjusted Markit/CIPS Purchasing Managers’ Index (PMI), which slipped to a four-month low of 54.2 in March, down from 54.5 in February, but stayed above the neutral mark of 50.0 for the eighth successive month.

The latest PMI reading compared favourably to its long-run trend (51.6).

The average over the opening quarter as a whole (54.7) was identical to the prior quarter’s near three-year high.

March saw the rate of increase in manufacturing production ease to its weakest during the current eight-month sequence of expansion. Sector data suggested that the slowdown was centred on consumer goods producers, with the pace of output growth in that industry only modest. In contrast, the intermediate and investment goods sectors both registered substantial and accelerated rates of increase.

UK manufacturers continued to benefit from solid inflows of new business. Part of the increase in new orders reflected further growth of foreign demand. The outlook for the sector also remained positive, with business optimism rising to a ten-month high.

Almost 52 per cent of companies forecast increased production in 12 months’ time, compared to only 6 per cent anticipating a decrease.

The ongoing upturn and positive outlook at manufacturers encouraged firms to further expand employment during March. Headcounts rose for the eighth month running, with the pace of jobs growth improving to its fastest in almost a year-and-a-half. Employment increased at both SMEs and larger-scale producers.

Price pressures remained elevated during March. Output charge inflation ticked slightly higher, moving back towards the near record high reached in January. The pass-through of rising raw material costs was the main factor driving up selling prices.

March saw input costs increase at one of the quickest rates in the survey history, albeit the weakest signalled since last September. Companies blamed higher costs on the weak sterling exchange rate and rising global commodity prices. Supply-chain pressures also played a role, as highlighted by the greatest lengthening of average vendor lead times in almost six years.

Andy Hall, head of corporate banking at Barclays, Central Scotland, said: “Although March saw an easing in output, manufacturing’s solid start to the year continues with healthy order books and exporters continuing to capitalise on sterling’s weakness. However, with inflation looming large, manufacturers should be increasingly conscious of the potential softening of UK domestic demand, which has been fuelling growth for some time.”

Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply, said: “Between the EU referendum in June 2017 and the triggering of Article 50 last week, British manufacturers have completed a remarkable return to confidence. However, with trouble brewing at the base of their supply chains, manufacturers must be wary of over confidence.

“Factories have revved up production for eight consecutive months on the back of new orders from both the UK and abroad. The feel good factor is being felt by workers with hiring growing at the fastest rate in a year and a half in March. The beginning of formal negotiations with the EU has failed to dampen the sense of optimism and manufacturers expect production to continue growing in the year ahead.

“Despite the confident mood, the depreciation in Sterling which has supported exporters has come at a price. The reduced buying power of the Pound has led to the 11th consecutive rise in input costs with consumers feeling the effects in the form of higher prices on the high street. Supplier delivery times have also begun to lag, clogging up the supply chains of British manufacturing. With the rate of new order growth showing early signs of easing in March, manufacturers must act to ensure they are not locked into costly contracts. Now is not the time for manufacturers to rest on their laurels.”

Rob Dobson, senior economist at IHS Markit, which compiles the survey, said: “The survey data suggest that the goods-producing sector made a solid contribution to GDP during the opening quarter of 2017. However, it’s clear that the expansion will be less than the buoyant 1.3% rise seen in the fourth quarter of last year.

“With growth losing further momentum in March, that weaker trend is likely to continue into the second quarter. The latest survey also clearly shows that high costs and weak wage growth are sapping the strength of consumers, with rates of expansion in output and new orders for these products slowing further.

“The domestic market remained the primary source of new business wins for manufacturers. The boost to export demand from the historically weak sterling exchange rate also played a role, albeit to a lesser degree than in recent months.

“The impact of the exchange rate is still being keenly felt on the cost side. Although purchase price inflation moved further from January’s record high, it remained among the steepest recorded in the 25-year survey history.

“The pass-through of these costs means selling price inflation remains stubbornly high. Inflation hawks at the Bank of England will be keeping a close eye on these price pressures to see if they remain contained or begin to pose a greater risk to consumer prices, and consumer spending, in the medium term.”

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