Manufacturing contraction slows unexpectedly

1 May 2013
By Edd Gent
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Figures released today show the manufacturing sector shrunk by the narrowest of margins in April

Figures released today show the manufacturing sector shrunk by the narrowest of margins in April

British manufacturing contracted by much less than expected according to the first major set of data for the second quarter.

Figures released today show the sector shrunk by the narrowest of margins in April, after the Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) rose to 49.8 from an upwardly revised 48.6 in March, putting the sector within a whisker of the 50 line that separates growth from contraction.

Manufacturing output fell 0.3 per cent in the first quarter while the economy grew 0.3 per cent, the preliminary official estimate of Britain's gross domestic product in the January-March period showed, but economists had expected a much weaker index reading of 48.5.

"It is welcome to see the sector showing signs of stabilising in April,” says Rob Dobson, senior economist at Markit and author of the survey. “The sector should at least be less of a drag on broader GDP growth in the second quarter."

He added that a strengthening in manufacturing would also boost other parts of the economy, such as the services.

Manufacturing accounts for 10.5 per cent of UK economy, according to the latest GDP release.

April's improvement in factory activity was helped by the first expansion in new orders since January, with the related sub-index climbing to 50.6 from March's 49.3.

New export orders rose for the first time in more than a year and at the fastest pace since July 2011 on the back of increased sales to North America, the Middle East, Latin America and Australia, but demand from the euro zone remained sluggish.

There was marginal growth in output led by the production of consumer items and investment goods such as factory equipment and there was also good news on inflation, with manufacturers' selling prices rising at the slowest pace since November while lower commodity and energy prices contributed to the first dip in their input costs since August.

"This provides headroom for the Bank of England's Monetary Policy Committee to extend its accommodative policy stance if GDP growth fails to gain traction in the coming months," Dobson says.

If the central bank were to announce more asset purchases this year, it would most likely do so either next week when it updates its quarterly economic forecasts or after its new governor Mark Carney takes over in July.

On a gloomier note, factories shed jobs for the third straight month in April, and chief economist for EEF, the manufacturers’ organisation, Lee Hopley is less upbeat about the figures.

“There’s been very little in any of the survey data over the past couple of months that would indicate that manufacturing has staged a recovery in the first quarter of the year,” she says.

“The continued weakness in the PMI is disappointing overall, but of particular concern is another month of falling export demand. While manufacturers have made some good gains in non-EU markets over the past couple of years, the on-going drag on orders from the Eurozone is still significant and likely to impact on prospects over the coming months.

"However, it’s important to note that large parts of the developed world are suffering downbeat numbers such as this and the UK economy is not an outlier in this respect.”

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