Manufacturing output rises on solid domestic demand01 June 2015

UK manufacturing saw further modest expansions of both output and new orders in May as a solid domestic market continued to offset lacklustre demand from overseas. The consumer goods sector remained the stand-out performer, while investment goods producers fared better than in April.

However, in the intermediate goods sector, the downturn in output continued. The seasonally adjusted Markit/CIPS Purchasing Manager's Index (PMI) – a summary indicator of overall manufacturing sector health – ticked higher to 52.0 in May, up from 51.8 in April.

The PMI has remained above the neutral 50.0 mark for 27 months. Although the rate of output growth edged lower, the extent of the easing was only minor and much less severe than April's steep slowdown.

May also saw the rate of growth in new orders picking up slightly from April's seven-month low. Companies attributed improved inflows of new work to solid domestic demand, rising client confidence and recent new product launches. The trend in new business from overseas remained lacklustre compared to conditions in the domestic market.

This was highlighted by the level of new export business holding stable in May following a modest decrease during April. The exchange rate and soft global market conditions were again cited by companies as factors contributing to the decrease in new work from abroad. Manufacturing employment rose for the 25th consecutive month in May.

However, the rate of jobs growth was only marginal and the weakest during the current sequence of rising staffing levels. Modest increases in capacity at consumer and investment goods producers were partly offset by job cuts in the intermediate goods sector.

Average selling prices rose for the first time in five months during May, mainly due to solid increases at both consumer and investment goods producers. Factory gate prices were broadly unchanged in the intermediate goods sector. Although May saw a further decrease in average input costs, the rate of price deflation slowed sharply over the month. Companies continued to report lower costs for a range of raw materials, but also noted that this had been partly offset by recent oil prices rises

Lee Hopley, chief economist at EEF, the manufacturers' organisation, said: "The UK PMI was broadly stable in May, confirming the picture seen in our quarterly Manufacturing Outlook survey that while manufacturing is still growing, the pace of growth has slackened. The weakening momentum in the sector is mostly down to a slowdown in oil and gas activity hitting the supply chain, though exports also remain a challenge.

"Today's strong gains in Eurozone PMI may be a cause for optimism, however, as manufacturers have noticed an uptick in demand in the UK's largest market."

Rob Dobson, senior economist at survey compiler Markit, added: "Expectations of a broad rebound in UK economic growth during the second quarter of the year are called into question by these readings. Manufacturing looks on course to act as a minor drag on the economy, as the sector is hit by a combination of the strong pound and weak business investment spending.

"The strength of sterling is serving a double-whammy for economic growth by constraining manufacturer's export performance and also driving a surge in cheap imports.

"Where growth is being reported by manufacturers, this remains heavily dependent on the domestic market, and consumer demand in particular. The challenge therefore remains for the new government to take the necessary steps to revive manufacturing, boost investment spending and improve export competitiveness if any headway is to be made on achieving the long promised rebalancing of the UK economy.

"Manufacturer's growth funk is also hurting job creation, with increases to payroll numbers easing to a near standstill in May. However, on the price front, the news was better for those hoping deflation may prove short-lived, as manufacturers raised their selling prices for the first time in five months. However, the victory may prove pyrrhic if this ultimately constrains consumer demand and removes the main prop underpinning the economic recovery."

Ian Vallely

Related Companies
EEF (Engineering Employers Federation)

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