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UK manufacturing output growth eases slightly

By Oliver Haill

Date: Thursday 01 Jun 2017

UK manufacturing output growth eases slightly

(ShareCast News) - UK manufacturing activity slowed as expected in May, according to a closely followed survey published on Thursday, but economists disagreed over whether it would be enough to buoy the overall economy.
The UK manufacturing purchasing managers' index from IHS Markit/CIPS slipped to 56.7 in May from the three-year high of 57.3 the previous month, but above the consensus estimate of 56.5.

With a PMI above 50 indicating growth, the sector seemed to have remained resilient in May, Markit said, with production and new orders both expanding at above-average rates, with good domestic demand and a solid increase in new export business.

Some economists suggested this was more to do with a global upturn than a benefit from sterling's ongoing weakness since the Brexit vote.

The output balance softened to 57.4 in May from 58.2 in April and export orders fell back to 53.5 from 55.6.

Employment rose for the tenth consecutive month, with the rate of jobs growth the fastest since June 2014.

Inflation in input costs and output charges from the weak pound and high raw material prices continued to remain elevated but eased further from recent highs.

Markit reported "signs of a sellers' market developing for some inputs, due to supply shortages and an associated lengthening of vendor lead times".

"The survey also provided positive signs that the upturn may be sustained, as growth of new orders remained solid, backlogs of work rose at the quickest pace in six years and business optimism improved to a 20-month high," said Rob Dobson, senior economist at IHS Markit.

Lee Hopley, chief economist at EEF, the manufacturers' trade body, said that output and order expansion was being driven by resilient domestic demand and a better looking global economy than UK manufacturers have been used to for some time.

But she added that the cost pressures following commodity price rises and a weaker sterling still coming through the pipeline "will continue to play a role in dampening the spirits of UK consumers".

"The growing demand for employees in the manufacturing sector should however provide additional support for ongoing positive labour trends, though will do little to help with the growing productivity challenge."

It's good but is it enough?

But while the manufacturing industry is enjoying solid growth, it is too small a sector to prevent the overall economy from struggling again in the second quarter, said economist Sam Tombs at Pantheon Macroeconomics.

"The manufacturing sector only accounts for 10% of GDP, so this will do little to offset the slowdowns in the construction and services sectors. Timelier surveys from the CBI, EC and Lloyds all suggest that the dominant services sector of the economy slowed in May."

He felt the survey showed the UK is failing to capitalise on the weaker pound, with the UK PMI slightly below the Eurzone's 57.0 reading also published on Thursday, despite sterling's depreciation.

"The pickup in manufacturing output therefore appears simply to have reflected a global trade upturn," he said, noting that export orders fell as manufacturers have "raised their prices so far that the cost of UK goods in overseas markets has barely fallen over the last 18 months".

"Producers are continuing to push through big prices increases-indeed, the output prices balance remained in the top 10% of all past readings since 2000, despite edged lower in May-suggesting that overseas demand will remain relatively weak ahead."

Tombs calculated that the three-month average of the survey's output balance is consistent, on the basis of historical form, with a quarterly gain in manufacturing output of around 0.8%, following growth of 0.3% in Q1.

Scott Bowman at Capital Economics saw the three-month gain as "almost 1%" and argued that sterling's slide was still providing some support for manufacturers.

"Despite the fall in the new export order balance from 55.7 to 53.5, it remained above its long-run average. And the fact that the overall new orders balance held up well suggests that domestic demand is picking up some of the slack.

"What's more, the fall in the input price balance to its lowest level since July 2016 suggests that the peak of sterling's pass-through to higher input prices has now passed."

"Overall, after the sharp slowdown in GDP growth in Q1, today's survey suggests that the manufacturing sector will play its part in an acceleration in growth in Q2," he said.


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