May data from Markit/CIPS signaled a continuation of the solid rebound in the United Kingdom manufacturing sector. The headline seasonally adjusted Purchasing Managers’ Index (PMI) steadied at 58.0, in line with April’s 15.5-year high and consistent with a marked rate of expansion.
The Manufacturing PMI – which is calculated from data on new orders, production, employment, supplier performance and stocks of purchases – 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 15.5-year high. Growth of output was supported by a further robust increase in new orders. Intermediate and investment goods producers saw the fastest rates of increase in output, with both sectors signaling sharper growth than one month ago. Consumer goods production rose at a comparatively modest rate that was the weakest since last November.
Improving market conditions and successful promotional efforts underpinned an eleventh 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 United States, 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. May saw manufacturers’ stocks of finished goods depleted at a marked rate that was the fastest since last October and the new orders-to-inventory ratio rise to a seven-month high. 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 the rate of jobs growth only slightly below April’s three-year high. Increased employment was linked to rising production requirements. It also reflected the accumulation of work-in-hand at manufacturers. Levels of outstanding business rose at the fastest rate since backlogs data were first collected in November 1999.
Average purchasing costs increased at the fastest rate since August 2008. Companies reported higher prices for chemicals, fuels, metals, packaging, paper and timber. The weak sterling exchange rate also raised the cost of some imported inputs. Supply chain factors played a role in driving purchase prices higher, as average vendor performance deteriorated to the greatest extent in the 18-year survey history. Output prices rose at the quickest rate since September 2008.
Rob Dobson, senior economist at Markit and author of the U.K. Manufacturing PMI, said: “U.K. manufacturing maintained its blistering start to second quarter. Although production remains well below pre-recession levels, the sector is now recovering its losses at a surprisingly rapid pace. The PMI suggests that output growth this quarter should at least match the first quarter gain of 1.2 percent reported by the official figures. This rapid growth is stretching capacity, leading to a survey-record increase in backlogs of uncompleted orders. 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, although 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. Austerity measures announced in the U.K. may cool home demand, while export sales may be hit by the sovereign debt crisis in our largest trading partner the Eurozone.”
Commenting on the report, David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “The strength of recovery of the U.K. manufacturing sector has taken everyone by surprise – this time last year, the industry was on its knees. 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 U.K. 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 U.K. economy as a whole. Higher employment means more money in the pockets of consumers which will have a positive knock-on effect on other parts of the economy and finally get us on the home run.”