U.K. manufacturing gathers pace as new order inflows strengthen

Sep. 1, 2017 – The rate of expansion in the U.K. manufacturing sector accelerated again in August. This was highlighted by the seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) posting 56.9, up from 55.3 in July, to its second highest level in over three years.

All five of the PMI components – output, new orders, employment, suppliers’ delivery times and stocks of purchases – were consistent with a stronger performance for the manufacturing industry during August.

Production rose at the steepest pace in seven months, underpinned by faster intakes of new work received. Moreover, rates of expansion in both variables were among the best registered since mid-2014.

The domestic market was the prime source of new contract wins, while the trend in new export business also remained robust. Although the rate of improvement in foreign demand eased from July’s near-record high, it remained among the strongest seen since new export orders data were first collected in January 1996.

Companies linked gains in new export work to increased business from mainland Europe, the U.S., China and Australia. The historical weakness of the sterling exchange rate was also reported to have boosted export competitiveness.

The stronger performance of the manufacturing sector filtered through to the labour market in August. Job creation was recorded for the thirteenth straight month, with the rate of increase the quickest since June 2014.

The upturn in U.K. manufacturing also remained broad-based in nature during August. Concurrent growth of output, total new orders, new export business and employment was recorded across the consumer, intermediate and investment goods sectors and also at SMEs and large-scale producers.

Purchase price inflation accelerated for the first time in seven months during August. However, the overall rate of increase remained well below the record high seen at the start of the year.

Almost 31 per cent of companies reported an increase in purchase prices, which they generally linked to the rising cost of commodities. Some noted that purchase price pressures had been exacerbated by shortages developing for certain key inputs. Supply-side constraints were also reflected in the trend in vendor lead times. Manufacturers’ selling prices rose at a solid, yet slower, pace.

Business optimism improved to a three-month high in August. Positive sentiment was attributed to rising demand, new product launches, efforts to improve market share and expand into new markets, a stronger global economy and planned investment spending. Over half of companies expect output to be higher in one year’s time, compared to less than 7 per cent that forecast a decline.

“The U.K. manufacturing sector continued to show signs of solid progress during the third quarter, with rates of expansion in output, new orders and employment all gathering pace in August,” said Rob Dobson, director at IHS Markit. “The key question is whether this positive start to the second half of the year can be sustained. This is looking increasingly likely during the near-term, given the breadth of the expansion. Business conditions improved across the three main sub sectors – consumer, intermediate and investment goods – and at smaller and large-scale producers alike. Business confidence also rose to one of its highest levels in over a year.

“Market forces continued to be supportive of the sector this month, as purchasing activity was strong, more jobs created and new orders rose across all three sectors, for companies large and small. Buoyed up by a rebound in domestic demand, the sector’s overall performance was one of the strongest since 2014,” said Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply. “But the impact on supply chains was less welcoming, as delivery times were stretched, and supplier performance has recently been the weakest since the middle of 2011. The sector experienced one of its longest lists of material shortages for many years, so suppliers will have to develop more forward-thinking strategies to build up stocks and meet ongoing demand, if the current wave of optimism and purchasing activity continues into the last quarter of the year.”