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UK manufacturing still growing despite cost pressures

1st Nov 17 2:42 pm

Here’s why

The UK manufacturing sector continued to grow in October, with the latest IHS Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) increasing from September’s figure of 55.9 to 56.3 and defying expectations. This marks the 15th consecutive month of growth for UK manufacturing and a welcome improvement on the previous month’s performance.

Despite increasing cost pressures on the sector, new orders and output growth remain strong and continue to grow. Growth has come in the form of increasing exports and domestic demand, supplying a steady stream of new orders to the sector.

Cross-industry growth

Growth has been consistent across the industry, including consumer, intermediate and investment goods. The intermediate and investment sectors have seen particular acceleration in production and new orders. The consumer sector seems to have had a more difficult time, as although still reporting growth, rates have slowed and business optimism is the lowest it has been for the year. Over 50% of the manufacturers surveyed expected higher output in the coming year, with only eight per cent expecting this to fall.

Rising exports and domestic demand

While the bulk of new business came from domestic orders, exports continue to rise, albeit at a slower pace. More new work is coming through from the USA, South America, Australia and Europe. The weakness of the Pound will undoubtedly have an influence here. With Sterling regaining a degree of strength, there may be pressure on export growth in the months ahead. 

Jobs growth on the up

With new business and production continuing to pick up the pace, employment growth is at over a three-year high.

Beware cost pressures…

Despite a positive outlook and continued growth for UK manufacturing, cost pressures continue to build. Selling price inflation is now at the highest level for six months and input costs are rising at the fastest for seven months.

David Johnson, founding director at currency specialist, Halo Financial, commented on the latest index: “It’s good to see increasing exports again this month, despite a slowing rate of growth in this area, which likely reflects an undervalued Pound and political uncertainty in the UK, Europe and US.

“Once again, cost pressures are being felt across the industry, increasing at pace. It’s always important for manufacturing businesses to look at opportunities to mitigate the risks posed by these growing inflationary pressures. Factors that will continue to put these costs up include exchange rate volatility, overseas demand and a recovery in some areas of the commodity markets.

“The strong performance of manufacturing businesses at the start of the final quarter of the year, measured alongside rising inflation in the sector, could add more impetus to the Bank of England’ decision tomorrow and may tip the balance towards raising interest rates. That would strengthen Sterling and put pressure on export sales”

Atul Kariya, manufacturing sector head at accountancy firm MHA MacIntyre Hudson, said:“Improving growth in the sector and an increase on last month’s figures demonstrate once again the continued resilience and drive of UK manufacturing. Overall, the sector has seen impressive performance to date, in the face of multiple economic and political pressures.”

“With activity continuing to expand across the sector and steady domestic and international demand, there is still time to plan rising costs into the overall and ongoing strategy and to review potential efficiencies and savings across the business.”

Laurence Gavin, partner at law firm, Irwin Mitchell,commented on the report: “These latest results reflect a reasonably positive picture for the manufacturing sector and provide some grounds for optimism for the final quarter of 2017. There are however some concerns for 2018, with inflationary pressures and ongoing uncertainties about the direction of Brexit negotiations.

“The Government now has the opportunity to ensure the momentum in the sector isn’t lost. Greater clarity with regards to the UK’s industrial strategy is important and we also look forward to the Budget later this month where the Chancellor has the opportunity to encourage greater investment.”

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