UK manufacturing continues rapid expansion

The Institute's Manufacturing Purchasing Managers' Index (PMI) – which is calculated from data on new orders, production, employment, supplier performance and stocks of purchases – steadied at 58.0 and has now remained above the no-change mark of 50.0 for eight consecutive months. May saw manufacturing production rise for the 12th successive month and the rate of expansion stay close to March's fifteen-and-a-half year high. Commenting on the report, Graeme Allinson, head of manufacturing, transport and logistics at Barclays Corporate, said: "British producers have certainly been quick to take advantage of any glimmer of increased confidence, adjusting their business operations to mirror levels of demand and looking to target international markets. It is essential for manufacturers to ensure they are not over-dependent on the government purse over the coming years however, as public spending around the world is increasingly squeezed by deficit reduction. In the UK there has been clear indication that spending cuts will be widespread and with 55 per cent of UK manufacturing supplying the home market, diversification, both in terms of import vs export and also the private vs public sector client mix, should be the order of the day." Growth of output was supported by a further robust increase in new orders. Improving market conditions and successful promotional efforts underpinned an 11th successive month-on-month increase in total new orders. Growth in new work was only slightly below April's six-year peak. Meanwhile, increased demand from China, Europe, the US, the Middle East and Africa led to a further near survey-record increase in new export orders. A number of firms indicated that the relatively weak sterling exchange rate continued to aid sales efforts in overseas markets. The latest survey suggested that the inventory cycle remains supportive of future production growth. There was also anecdotal evidence from manufacturers that part of the gain in new orders reflected clients rebuilding their stock holdings. Employment rose for the second month running in May with increased employment being linked to rising production requirements and an accumulation of work-in-hand at manufacturers. Average purchasing costs increased at the fastest rate since August 2008 with companies reporting higher prices for chemicals, fuels, metals, packaging, paper and timber. The weak sterling exchange rate also raised the cost of some imported inputs. CIPS CEO David Noble (pictured), said the strength of recovery of the UK manufacturing sector had taken everyone by surprise – "this time last year, the industry was on its knees". He went on: "While the turnaround so far this year is obviously good news, we can't forget this has been driven in large part by the weak sterling exchange rate bolstering export demand. Problems in countries such as Greece and Spain have strengthened the pound against the Euro recently and could also have a severe impact on the Eurozone economy. Given the euro countries are Britain's biggest trading partners, any double-dip recession there would undoubtedly damage the UK manufacturing sector. "There are also additional troubles looming on the horizon which could constrain the pace of recovery. The boost from the inventory cycle will eventually wane, as firms stop balancing their stock, meanwhile, the new government's austerity measures will undoubtedly dampen the domestic market. Despite all this, the increase in manufacturing jobs is very good news, not just for the health of the sector but for the UK economy as a whole. Higher employment means more money in the pockets of consumers which will have a positiveknock-on effect on other parts of the economy and finally get us on the homerun." The CIPS report's author, Rob Dobson, senior economist at Markit said UK manufacturing had maintained its "blistering" start to the second quarter although production remained well below pre-recession levels. "This rapid growth is stretching capacity, leading to a survey-record increase in backlogs of uncompleted orders," he went on. "The good news is that this encouraged employers to boost staffing levels again, and a strong rise in orders for plant and machinery suggest that companies are also boosting their investment spending." However, Dobson warned that, "growth was driven by a combination of robust demand from domestic customers and a strong export performance, both of these sources of new orders may disappoint as we move into the summer."