British manufacturers increased production at the fastest pace in more than two years in October, offering a rare bright spot for the economy, but rising energy, transport and labour costs are threatening to undermine the recovery.
The S&P Global UK manufacturing purchasing managers’ index rose to 52.8 last month, from 51.9 in September, marking the strongest expansion in factory activity for 25 months. A reading above 50 indicates growth, and the sector has now recorded a year of expanding activity.
The survey, closely watched by economists as an indicator of business conditions, pointed to improving demand at home and overseas, with manufacturers reporting stronger orders from customers in China, the EU and the US.
Rob Dobson, director at S&P Global Market Intelligence, said manufacturers had “showed resilience in the lead up to the autumn Budget”.
But he warned that the improvement was taking place against a backdrop of mounting cost pressures, with businesses facing higher wages, energy bills and transportation charges.
“As well as higher wage costs, manufacturers are being buffeted by rising fuel, energy and transportation costs as supply-chain shocks and delays continued to drive up inflationary pressures,” he said.
The findings suggest that the recovery in industrial output could come at a price for consumers. Manufacturers have reported rising input costs — including the price of materials and components — for almost three years, with increases accelerating to their sharpest pace since the spring.
Some companies have responded by passing those costs on through higher selling prices, raising the prospect that renewed industrial growth could add to inflationary pressure across the wider economy.
Supply-chain disruption is compounding the problem. Shipping routes have been diverted, ports remain congested and shortages of materials have extended delivery times. Some manufacturers said longer waits for supplies were becoming the norm, rather than an exceptional disruption.
The outlook is further complicated by the planned increase in the national minimum wage from April, confirmed in last week’s Budget, which is expected to add to employers’ wage bills.
Matt Swannell, chief economic adviser to the Item Club, said manufacturing strength was emerging even as the wider economy absorbed the effects of the energy shock caused by conflict in the Middle East.
“Some of this strength is due to AI-related activities and looks durable,” he said.
However, he warned that households were likely to face a more difficult period as inflation eroded purchasing power.
“Domestic consumer demand will come under pressure as real incomes are squeezed by rising inflation,” he said.
Higher costs for energy, fuel and chemicals are also likely to push manufacturers to raise prices further, as businesses seek to protect margins.
The prospect of higher interest rates adds another headwind. The Bank of England is widely expected to raise borrowing costs this week, a move that could make investment more expensive and discourage manufacturers from expanding capacity.
October’s figures offer evidence that British industry is recovering. But whether that momentum can survive rising costs, weaker consumer demand and tighter monetary policy remains uncertain.
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