U.K. manufacturing report shows recovery continued in July

The United Kingdom manufacturing sector made a robust start to the third quarter of 2010. Latest data from Markit and CIPS signaled further marked increases in both production and new work received in July, which encouraged manufacturers to raise employment for the fourth consecutive month. The recovery also remained broad-based, with growth of output, new orders and jobs reported across the consumer, intermediate and investment goods sectors.

The seasonally adjusted Markit/CIPS U.K. Manufacturing Purchasing Managers’ Index – which is calculated from data on new orders, production, employment, supplier performance and stocks of purchases – posted 57.3 in July, down from 57.6 in June. Although the headline PMI fell to a five-month low, it remained well above the survey average (51.1) and broadly in line with that recorded for Q2 2010 (57.9).

Production increased for the 14th month running in July. Although the rate of expansion was the weakest so far in 2010, and eased further from March’s 15.5-year high, it remained robust overall. Underlying the latest rise in output was a marked increase in new orders. Companies linked fuller order books to an improving domestic market, clients restocking, the development of new products and stronger business confidence.

Moreover, growth in total new orders accelerated in July despite the rate of expansion in new export orders remaining relatively muted. Foreign demand showed only a slight improvement, a marked downshift from the series record growth seen only three months ago. Companies reported increased sales to United States and Asian clients, but this was largely offset by slower trade flows to the Eurozone.

The ongoing recovery of the sector encouraged manufacturers to raise employment for the fourth month running in July. The rate of job creation remained solid, albeit slower than June’s 15-year high. Part of the increase in staffing levels reflected efforts to reduce backlogs of work. Subsequently, the level of work-in-hand (but not yet completed) fell for the first time in four months.

Price pressures remained elevated in July, but also showed further signs of easing. Although average purchase prices continued to rise at a substantial pace, the rate of inflation slowed sharply to a five-month low. Companies reported a range of raw materials as up in price, including chemicals, electronic components, energy, food products, metals, packaging, paper and timber. Ongoing supply-chain disruption also contributed to higher input prices, as highlighted by a marked deterioration in vendor performance.

Meanwhile, output prices rose for the ninth month running, as manufacturers passed on part of the increase in costs to their clients in the form of higher charges. Some firms linked increased factory gate prices to improved demand.

Rob Dobson, senior Economist at Markit and author of the U.K. Manufacturing PMI, stated: “U.K. manufacturing continued to boom at the start of the third quarter, with the PMI suggesting only a slight loss of momentum from the 1.6 percent surge in production seen in the second quarter. The PMI is showing surprising resilience, having fallen only modestly since hitting a 15.5-year peak in May, and July even saw new order growth accelerate again, largely on the back of rising domestic demand. This all suggests that the manufacturing sector will remain a strong contributor to GDP in Q3, raising hopes that growth of the economy may not slow too significantly from the 1.1 percent bumper figure already seen for GDP in Q2. There are some concerns that growth may slow more sharply in coming months, however, especially in relation to exports. Overseas sales growth collapsed from a survey record rate of increase in April to near-stagnation in July. Some slowing was to be expected, given the weakening in global trade flows that have been evident in recent months, particularly in Asia, as authorities act to cool their economies to ward off inflation. But the extent of the slowdown in export sales is very surprising, and suggests that U.K. manufacturers are losing out in the global recovery, which will disappoint those that are hoping the U.K. economy can rebalance away from domestic consumption toward exports.”

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, added: “Even after the booming growth seen in the first half of 2010, it’s good to see the U.K. manufacturing sector holding strong as we head into the second half of the year. As expected, we’re starting to see the PMI taper from the post-recession growth peak, but this is certainly happening at a slower pace than originally anticipated, which means we can breathe again. While trade from Europe slowed, this was partially offset by strong demand from the U.S. and Asia. Despite this subdued demand for export goods, volumes of new orders were still strong, which coupled with increased production, encouraged firms of all types and sizes to raise their headcount. Looking forward, we anticipate a measured and muted pace of growth, which, relative to the unprecedented lows hit during the downturn, is still a step in the right direction.”