U.K. manufacturing slows at start of 2018

Feb. 2, 2018 – The start of 2018 saw a further easing in the rate of expansion of the U.K. manufacturing sector. At 55.3 in January, the seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) was down further from November’s 51-month high and at its lowest level since June last year. That said, the PMI remained well above its long-run average of 51.7.

Manufacturing output continued to rise at a solid pace, although the rate of expansion eased to a six-month low. Higher production reflected rising new order intakes, albeit the slowest in seven months, which increased through robust demand from both domestic and export clients.

Sector data signalled solid increases in output and new orders across the consumer, intermediate and investment goods sectors. Rates of expansion were higher in the latter compared to those at consumer and intermediate goods producers.

January saw the trend in new export order inflows strengthen. Foreign demand improved at one of the quickest rates over the past four years. There were reports of increased sales to clients in North America, China, mainland Europe, the Middle East and Japan.

One consequence of the upturn was an upsurge in price pressures. On the cost side, increased demand for inputs led to improved supplier pricing power and shortages of raw materials, resulting in a marked acceleration in input cost inflation.

Purchase prices rose at the fastest rate in 11 months and to one of the greatest extents in the survey history. Companies reported a wide range of raw materials and commodities as up in price, including chemicals, food products, metals, oil, paper and plastics. Part of the increase in costs was passed on to clients in the form of higher selling prices. January saw the steepest increase in output charges since April of last year.

Input buying activity among U.K. manufacturers rose for the eighteenth successive month, with the rate of increase remaining marked. Some companies reported bringing forward planned purchases to guard against future prices rises and delays in the delivery of goods from suppliers.

Vendor performance continued to deteriorate at the start of 2018. Average supplier delivery times lengthened to a marked extent, albeit slightly less so than before the turn of the year.

U.K. manufacturers maintained a positive outlook, with over 55 per cent forecasting production to be higher in one year’s time. Optimism reflected improved market conditions, global economic expansion, fuller order books, export opportunities, investment in new equipment and planned product launches.

“Encouragingly, despite the slowdown, the latest survey is consistent with production rising at a solid quarterly rate of around 0.6 per cent in January, with jobs also being added at a faster pace. However, output growth has slowed sharply since last November’s high, and the more forward-looking new orders index has slipped to a seven-month low. The trend in demand will need to strengthen in the near-term to prevent further growth momentum being lost in the coming months,” said Rob Dobson, director at IHS Markit. “The biggest advance during the latest survey came on the prices front, with the recent easing in inflationary pressure seeing a sudden sharp reversal. Cost inflation surged to an 11-month high and to one of its highest levels in the series history, as oil prices surged higher and demand for many inputs outpaced supply. The pass-through of these costs took selling price inflation to its highest in nine months. These price trends will be watched closely to see if the upsurge is simply a one-off spike or something more embedded.”

“Growth in the manufacturing sector continues to provide positive encouragement for the U.K. economy as the year started on a positive, if slightly reserved note,” added Duncan Brock, director of customer relationships at the Chartered Institute of Procurement & Supply. “Along with the strength of the global economy and investment by the sector in marketing and product launches, this is setting manufacturing up for a successful year ahead.”