U.K. manufacturing production growth hits 13-year high

Data from the Chartered Institute of Purchasing & Supply and NTC Economics signaled that conditions in the United Kingdom manufacturing sector continued to strengthen in August. Production rose at its fastest pace since October 1994, underpinned by robust domestic market conditions and accelerated growth of new export orders.

The seasonally adjusted CIPS/NTC Purchasing Managers’ Index (PMI) – an index designed to provide an overall snapshot of operating conditions in the manufacturing sector – rose to a thirty-seven month high of 56.3 in August. The PMI has now remained above the neutral 50.0 mark for 20 successive months, its most sustained period above this benchmark level during the past 12 years.

Production expanded for the 27th successive month in August, with a broad growth of output across the manufacturing sector. The consumer, intermediate and investment goods sectors all recorded marked increases.

After rising for the 25th month in a row in August, the current period of growth in incoming new orders is the most sustained for more than 12 years as the seasonally adjusted New Orders Index posted a reading of 57.4. The domestic market provided the main support to the latest increase in new work received. Export conditions showed a noticeable improvement, with growth in new orders from abroad rising at the strongest pace since January 2004. Companies reported an increase in new work received from clients operating in North America, South America, Asia, Germany and Africa.

Continuing the trend observed since the start of 2007, the level of U.K. manufacturing employment increased for the 39th month with the seasonally adjusted Employment Index recording a reading 52.5. Growth was linked to rising levels of production and incoming new work.

August data indicated that rates of inflation for average input costs and output prices remained elevated, albeit slower than last month’s reading.

Although falling to a four-month low in August, the seasonally adjusted Input Prices Index posted a reading of 64.1 and remained well above the 50.0 no-change mark.

Companies reported increases in the average prices paid for metals, polymers, timber, packaging and food products. Part of the increase in input costs was attributed to the short supply of certain raw materials.

Average output prices rose sharply in August. Although the rate of increase was the lowest for five months, it was only slightly below the highs seen in July and earlier in the year. Increased costs were the principal factor pushing charges higher, and there were reports that buoyant demand encouraged some firms to raise their prices.

Purchasing activity increased markedly during August, as the seasonally adjusted Quantity of Purchases Index posted a reading of 56.3. Companies raised their input buying volumes in order to meet higher production requirements. Part of the increase in purchasing led to a slight rise in stocks of raw materials, the second time in the past three months that inventory holdings have expanded.

August data pointed to a further marked deterioration in average supplier performance. Vendor lead-times have now lengthened in each of the past 50 months.

Roy Ayliffe, director of professional practice at CIPS, said: “Purchasing managers reported another solid month from the manufacturing sector as production rose at its fastest pace in 13 years. Such growth was largely driven by the U.K.’s domestic market as well as increased demand from the overseas – particularly in America, Asia, Germany and Africa. Although levels of inflation have eased slightly to a four-month low, additional shortages in the supply of key materials continue to place added pressure on the sector. This is creating a direct impact on factories which are paying higher costs for key materials such as metals, packaging and food products.”

Commenting on the CIPS/NTC U.K. Manufacturing PMI survey data, NTC economist Rob Dobson said: "The latest data suggest that the U.K. manufacturing sector is still highly robust, with output expanding at the fastest rate since October 1994 and the current period of new order growth the most sustained for 12 years. If this buoyancy is reflected in the official data, growth of manufacturing production for Q3 2007 as a whole could average a healthy 2.0 to 2.5 percent year-on-year. If forthcoming high frequency data releases also point to ongoing strength in the U.K. economy, this could lead the MPC to raise rates in response to the strong growth and inflationary environment. However, if the MPC place a greater weight on the volatility in global credit and equity markets, and take into account that the full effects of the current monetary tightening cycle are still filtering through, the most likely outcome will be to adopt a wait-and-see posture at their next meeting."