UK manufacturing output on the climb

City A.M. Reporter
Manufacturing growth picked up pace last month for the first time since March and broader activity in the sector also accelerated unexpectedly, a leading industry survey showed.

Markit/CIPS's headline manufacturing Purchasing Managers' Index (PMI) rose to 54.9 from September's 10-month low of 53.5, its highest level since July and in contrast to economists' expectations for a fall to 53.1.

The rise in the index above its mid-point of 50 means activity grew faster than in the previous month, and will increase doubts created by recent strong growth data that the Bank of England will soon embark on more quantitative easing.

The output component of the headline PMI – which corresponds more closely to manufacturing's contribution to total GDP growth – rose for the first time since March, increasing to 56.4 from 54.5.

"Manufacturing remained a driver of UK economic growth at the start of the final quarter," said Rob Dobson, senior economist at Markit, which compiles the PMI index with the Chartered Institute of Purchasing and Supply (CIPS).

"Rates of expansion in output and new orders strengthened following the sharpest gain in new export orders for five months, with the export performance of intermediate and investment goods producers especially robust," he added.

The data adds to the evidence from third-quarter gross domestic product (GDP) and retail industry surveys that Britain's economy is not slowing as rapidly in the second half of the year as many economists feared it might.

Stronger export orders and investment will raise hopes the economy is shifting away from a reliance on domestic consumer and government spending, which will be key for future growth given looming public sector spending cuts and job losses.

"The October rebound in investment goods production and a sharp increase in manufacturing job creation provide early positive portents," Dobson said.

Employment in the sector rose at its fastest monthly pace since the 15-year high set in June.

Inflation in manufacturers' input costs and in the prices they charged for finished goods picked up but remained below peaks reached earlier this year.

However, manufacturers appeared to expect hefty future rises in raw materials costs, as they increased stock levels for the first time since November 2007 and at the fastest pace in the survey's 18-year history.

"There were reports of manufacturers building 'safety stocks' to guard against raw material shortages, supplier delivery delays and expected future price increases," Markit said.

This is likely to give the Bank further pause for thought when its Monetary Policy Committee meets on Wednesday and Thursday.

The MPC is split between those who believe that current above-target inflation of 3.1 percent is likely to fall rapidly once one-off factors such as rises in sales tax fade, and those who fear expectations of higher inflation are starting to get entrenched.