UK manufacturing grows, but cost pressures increase

UK manufacturing activity grew at its fastest rate in 16 years in December, according to one industry survey.

The Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI), which measures new orders, output and employment, showed a monthly increase of 0.8 points to 58.3 – its highest reading since September 1994.

Production and new orders increased at their fastest rates since May, while jobs growth continued for the ninth consecutive month and stayed close to the record high seen in November, said the survey.

But cost pressures, likely to be exaggerated by today’s VAT rise to 20%, continued to build as average input prices rose at the fastest rate in the survey’s nineteen-year history.

Rob Dobson, senior economist at Markit and index author, said: ‘The latest data are consistent with manufacturing production rising at a quarterly rate close to 2.0%.

‘[This] should generate a meaningful contribution from the sector to economic growth in the fourth quarter to offset likely weakness in other sectors.

‘All of this points to manufacturing being a positive spur to economic recovery in the final quarter.

‘On the downside, the other stand-out figure was a survey record increase in average input costs.

‘Manufacturers in sectors such as clothing, food products and chemicals were hit hard by demand exceeding supply for certain key inputs, as well as rising energy costs.’

The steepest cost increases were seen in the textiles and clothing, food and drink, and chemicals and plastics sectors, amid reports of higher prices for cotton, food products and energy. Costs also rose substantially in the other sectors covered by the survey.

David Noble, CEO at the Chartered Institute of Purchasing & Supply (CIPS), said: ‘The start of 2011 is likely to be ’all systems go’ for UK manufacturing, with December’s PMI demonstrating a huge turnaround of fortunes compared with two years ago.

‘Before we breathe a sigh of relief, last month was not without its challenges. Adverse weather conditions contributed to longer vendor lead times, while surging demand for certain goods has depleted stocks, leading some purchasers to try and replenish inventories.

‘There are also ongoing efforts to guard against rising cost inflation and possible further winter disruption to the supply chain by buying early.

‘With this and also customers likely to see further costs passed down following the VAT increase in January, the economy will still see some pressures.’

The Markit/CIPS UK Manufacturing PMI is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 600 industrial companies.