Manufacturing makes strong start to 2017 despite survey record increase in input costs
Wednesday, February 01, 2017
Markit/CIPS UK Manufacturing PMI®
- UK Manufacturing PMI at 55.9 in January
- Output growth at 32-month high
- Purchase price inflation at new survey record
The UK manufacturing sector made a strong start to 2017. Output rose at the fastest rate since May 2014, as new order intakes expanded at a robust pace. Price pressures intensified, however, as input cost inflation surged to a survey record high and output charges also increased at one of the steepest rates in the series history.
The seasonally adjusted Markit/CIPS Purchasing Managers’ Index® (PMI®) posted 55.9 in January, only a couple of ticks below December’s two-anda-half year high of 56.1. The headline PMI has remained above the neutral mark of 50.0 for six straight months.
The latest expansion of manufacturing production was underpinned by a solid increase in new order intakes. The rate of growth in new business moderated following the prior month’s high, but remained well above the long-run survey average.
The domestic market was the prime source of new business wins in January. There was also a modest increase in new export orders, although the pace of expansion was noticeably slower than during the prior survey month. Where an increase in new work from overseas was reported, this was linked to improving global market conditions and the weak sterling exchange rate.
By sector, the strongest growth of output and new orders was registered by intermediate goods producers. The investment and consumer goods sectors also registered further solid expansions ofproduction and new business.
Average purchase prices rose at the steepest rate in the quarter-century history of the survey, driven up by the weak sterling exchange rate and higher costs for commodities such as oil, plastics and steel. Meanwhile, improved pricing power and efforts to pass on part of the increase in costs led to a further sharp rise in average selling prices.Output charges rose to one of the greatest extents in the series history.
Supplier price hikes also played a role in raising average purchasing costs in January. Companies indicated that higher demand for raw materials was testing the capacity at vendors and leading to shortages of certain inputs.
Manufacturing employment rose for the sixth successive month in January, albeit to a lesser extent than one month earlier. The faster pace of job creation was signalled at SMEs, whereas the increase at large-sized producers was only mild.
The January report sees the official launch of a new index tracking business optimism – the Future Output Index – based on a question asking companies if they expect production to be higher, the same or lower in one year’s time.Confidence rose to an eight-month high in January. Almost 51% of respondents expect output to rise over the next 12 months, reflecting new market opportunities and planned product launches.
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply: “The sector was awash with optimism, recording an increase in new orders and the fastest rise in activity since May 2014. The domestic market led the way in the growth of new orders, alongside robust consumer, intermediate and investment goods production, to offset the softer expansion in export orders.
“The ongoing boost in staffing levels, recorded forthe sixth consecutive month, showed SMEs with the largest appetite for expansion, though larger firms also increased employment. With the sector’s surge of positive business sentiment to an eight- month high, this boost to the employment figures will give the sector the robust platform it needs for opportunities ahead, as the UK remains the fastest growing economy in the G7.
“But there were pressures on the price front as input costs rose at their fastest rate in 25 years and higher commodity prices made an impact on margins along with the weaker pound. With these ongoing cost burdens, manufacturers were no longer able to absorb these costs themselves as output prices grew at one of the fastest rates since records began. Consumers must soon bewondering whether these rising costs will impact on their daily life.”
Rob Dobson, Senior Economist at IHS Markit, which compiles the survey: “UK manufacturers have reported a bumper start to 2017, but are also seeing prices rise at an unprecedented rate. Factory output growth accelerated to a 32-month high in January, as solid domestic demand continued to drive production volumes higher. There were signs that the boost to export orders from the weak exchange rate was waning, as growth of new business from abroadslowed sharply.
“The big numbers coming out of the January survey were for the price measures. Input cost inflation spiked to the highest seen since data were first collected in 1992. Over 55% of companies link rising costs to the exchange rate. However, we’re also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel.With cost pressures increasingly feeding though to higher selling prices at factories, it looks inevitable that consumer price inflation will rise further in coming months.
“The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth going forward. Companies seem fairly sanguine on this front, as a new index tracking business confidence signals optimism climbed to an eight-month high. Taken alongside robust output growth, rising new order inflows and job creation, all signs are pointing to a solid contribution to UK GDP from manufacturing during the opening quarter of 2017.”
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Trudy SalandiakTel: +44 1780 761576