Output growth for U.K. manufacturers accelerated for first time since March

Growth of United Kingdom manufacturing production accelerated for the first time in seven months in October. Output rose in response to faster inflows of new business and a solid increase in new export orders. However, supply-side constraints and expected future input price increases led to a marked rise in purchasing and survey record growth in raw material stocks.

At 54.9 in October, up from September’s 10-month low of 53.5, the seasonally adjusted Markit/CIPS U.K. Manufacturing Purchasing Managers’ Index (PMI) rose for the first time since reaching a 15.5-year high in May. The PMI has now remained above the neutral 50.0 mark for 15 successive months.

Strong output growth in the intermediate goods sector underpinned a solid increase in U.K. manufacturing production in October. Modest expansions were also seen in the capital and consumer goods sectors. Manufacturing output has now risen for seventeen successive months.

Companies linked the increase in total new orders to higher export sales, improved marketing and successful product promotions. New export orders five months, representing a marked turnaround from the reduction seen in September. Companies reported higher sales to mainland Europe, Latin America, the Middle East and Africa.

The rate of job creation picked up sharply in October. Employment rose at the fastest rate since June, reflecting improved demand, higher production and increases to sales and support staff. Jobs were added in the consumer, intermediate and investment goods sectors.

There were further signs that supply-side factors and expected input cost increases were influencing the purchasing and stock holding decisions of U.K. manufacturers.

Input buying volumes rose for the thirteenth consecutive month in October. The rate of increase accelerated sharply, as companies raised purchasing to guard against supply shortages, rising costs and further vendor delivery delays. Stocks of purchases subsequently rose at the sharpest pace in the survey history.

October saw average vendor lead-times lengthen to the weakest extent so far in 2010. However, the deterioration in vendor performance remained marked overall. Manufacturers blamed raw material shortages and low stock holdings at suppliers for longer lead times.

Average input costs rose for the fourteenth month in a row during October, reflecting higher prices for chemicals, copper, food products, metals, packaging materials, paper and timber. Shortages of certain inputs also resulted in higher purchase prices. Part of the increase in costs was passed on to clients in the form of higher charges in October. Output prices have now risen throughout the past year.

Rob Dobson, senior economist at Markit and author of the U.K. Manufacturing PMI, stated: “An improvement in the U.K. Manufacturing PMI for the first time since May’s 15-year high will provide reassurance that manufacturing remained a driver of U.K. economic growth at the start of the final quarter. 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. Looking ahead, business confidence, private investment spending and exports will be important to sustaining the recovery as growth derived from the public sector and consumers is hit by austerity measures and rising job insecurity. To this end, the October rebound in investment goods production and a sharp increase in manufacturing job creation provide early positive portents.”

David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “Exports are very much the engine of growth within manufacturing at the moment. Whilst it is very positive to see the sector expanding strongly again, it’s difficult to predict the impact of fluctuations in export markets so the recovery may continue to be bumpy. What is clear is that manufacturing looks set to drive further GDP growth in Q4. New orders are providing manufacturing purchasers with a mandate to increase activity and hire new staff, but inevitably, there will be hard graft ahead as pressure on supply chains remains a big concern. The increased buying activity happening now is calculated to replace depleted stock and avoid expected input price increases, which are already being passed on to customers.”