Britain’s manufacturers ended 2016 on a strong note, according to a survey that signalled the fastest growth in the sector for more than two years and indicated that the weak pound had boosted exports.
Defying economists’ expectations for a slowdown, the manufacturing sector enjoyed stronger expansion and a pick-up in orders from home and abroad in December. But cost pressures persisted as the pound’s weakness since the referendum continued to make imports more expensive.
The headline reading on the closely watched Markit/CIPS UK Manufacturing PMI report (pdf) rose to 56.1 in December from 53.6 in November. That was well above the 50-mark separating growth from contraction and beat forecasts for 53.1 by economists in a Reuters poll.
It was the highest reading for 30 months and could soothe fears that the UK economy will slow markedly this year as the weak pound stokes inflation and Brexit negotiations make consumers and businesses nervous about spending.
Rob Dobson, senior economist at IHS Markit, which compiles the survey, said: “The UK manufacturing sector starts 2017 on a strong footing. The headline PMI [Purchasing Managers’ Index] hit a two-and-a-half year high in December, with rates of expansion in output and new orders among the fastest seen during the survey’s 25-year history.”
New export business rose for the seventh successive month in December as exports were helped by the pound’s sharp drop against the euro, dollar and other currencies, which makes UK goods cheaper in overseas markets.
The PMI report, which surveys more than 600 companies in the manufacturing sector, found they reported a pick-up in demand from the US, Europe, China, Middle East, India and other Asian markets.
There was also an improvement in domestic demand and Dobson noted promising signs for the economic outlook from the nature of the demand.
“A plus point from the December survey was that the expansion was led by the investment and intermediate goods sectors, suggesting capital spending and corporate demand took the reins from the consumer in driving industrial growth forward,” he said.
The poll also showed that employment in the manufacturing sector rose for the fifth consecutive month in December, with the pace of jobs growth accelerating to the fastest in 14 months.
However, echoing a pattern seen in official data, factory costs continued to rise in December, with companies passing some of the increase on to customers. Rates of inflation for input costs and output charges were among the fastest seen in the survey’s history, albeit both slowing from October’s highs.
The manufacturing sector, which makes up a 10th of the economy, is expected to face a challenging year as energy and material costs remain high and Brexit talks strain consumer and business confidence.
The latest official figures for the sector have painted a different picture to the PMI reports. They showed that after contracting in the three months following the Brexit vote, manufacturing output fell again in October amid an even sharper fall for the wider industrial sector, which includes utilities and oil extraction.
Based on that official take, manufacturing would struggle to emulate the PMI survey’s buoyant picture, said Martin Beck, senior economic adviser to forecasting group EY Item Club.
“Looking forward, 2017 is likely to see a slowdown in domestic demand as higher inflation bites. But a likely continuation of sterling’s weakness and a stronger global outlook offers some cause for optimism among ‘the makers’,” he added.
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