Hopes raised as PMI data shows sector on the up

The Index posted 51.2 in February, down slightly from January's eight-month high of 52.0, to register back-to-back readings above the neutral mark of 50.0. The data showed UK manufacturing production and employment continuing to expand during February, although "the headwinds faced by the sector were brought into sharper focus". The arrival of new work and export orders were both broadly unchanged following mild gains in January, while cost inflationary pressures rose sharply. Manufacturers reported an increase in average raw material prices for the first time in four months with the index that tracks input prices posting its steepest month-on-month gain in over 19 years. Companies reported higher prices for chemicals, feedstocks, metals, oil, plastics and transportation. Rob Dobson, senior economist at Markit and author of the PMI said the rise in production and employment raised hopes that the sector will post an expansion over Q1 as a whole, or at least improve on the disappointing 0.9% contraction seen at the end of last year. CIPS CEO David Noble believed that the return of rising oil prices and lacklustre demand was "a cause of some trepidation". He went on: "Manufacturers have persisted in working through backlogs of work, but the Eurozone crisis continues to loom large with continued declines in new work from the Continent. "As a result of continued growth in orders in Asia and the US, the focus for many manufacturers will be on developing as exporters to new markets." Mark Lee, head of manufacturing at Barclays was particularly enthusiastic about the strong output performance. The bank was now having far more positive conversations with manufacturers, private equity was becoming more active with greater talk of mergers and acquisitions among industrial companies. "However, Lee added, "there is still a divide in the manufacturing sector between SMEs and large caps, between purely domestic players and exporters and to a certain extent between North and South. Until we see UK domestic demand really gaining traction there is still going to be a part of the sector in which recession remains a reality."