UK manufacturing growth boosts economy

1 February 2013
By Sofia Mitra-Thakur
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UK's manufacturing sector expanded modestly in January as output grew at the fastest pace since September 2011

UK's manufacturing sector expanded modestly in January as output grew at the fastest pace since September 2011

New figures show that output from the manufacturing sector rose last month at its fastest pace since September 2011, boosting hopes that Britain will avoid a triple-dip recession.

The latest Markit/CIPS purchasing managers' index (PMI) showed overall activity expanded thanks to the rise in output, with a headline reading of 50.8 in January – just short of forecasts for a reading of 51.0, but above the 50 level that separates growth from contraction for the second month in a row. 

While this was down on the 51.2 reading in December, it came despite last month's snow and adverse weather, which many had feared would impact on manufacturers badly.

A subindex measuring change in output compared to the previous month climbed to 54.2 from 53.4 in December while new orders rose for the third consecutive month, also helped by the home market.

The sector was a significant drag on the wider economy at the end of last year, contributing to the worse-than-expected 0.3 per cent decline in gross domestic product (GDP) in the fourth quarter of 2012.

Last week's GDP blow has raised fears that the UK is heading for an unprecedented triple-dip recession – its third recession in four years.

The economy would have to contract again this quarter to be back in recession, and there has been little optimism following the snow-hit start to 2013.

The latest manufacturing report suggests the worst is over for the sector, which accounts for about 10 per cent of the economy.

Markit said the impact of factory output would be limited.

"The survey will do little to assuage fears of a triple-dip recession unless accompanied by an improvement in the services sector," said Rob Dobson, the Markit economist who compiled the survey.

Production of consumer goods grew robustly last month and output of intermediate products such as car engines also rose, Markit said.

But manufacturing of investment goods such as factory equipment declined.

Employment in manufacturing ticked up, in contrast to the job losses that afflicted the sector for much of 2012.

"A small gain in employment suggests that firms are less focused on cost reduction amid signs of improved order books, which should lead to further production growth in February," Dobson said.

"Sterling's weakness, plus indications of firmer demand in key export markets such as the euro zone, notably Germany, and emerging markets such as China should also help lift sales in coming months," he added.

James Knightley, economist at ING Bank, said the report "offers hope that the GDP contraction in the fourth quarter will not be repeated in the first quarter of 2013".

Howard Archer, chief UK and European economist at IHS Global Insight, added a note of caution over the sector's outlook for the year ahead.

"The manufacturing sector may be past the worst after a pretty torrid 2012, but it still has its work cut out to return to sustainable decent growth in the face of ongoing challenging domestic and international conditions," he said.

For now, companies said weak demand from continental Europe was behind the 13th consecutive drop in new export orders.

Solid input price inflation continued to eat into manufacturers' profit margins, as the prices they charged rose by a smaller margin.

Firms reported higher costs of chemicals, energy, food products, metals, packaging and plastics.

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