Manufacturing rises - but not enough

Growth in the manufacturing sector fell in February, although it also reduced its exposure to the eurozone. Does this suggest a recession's inevitable?

by Emma Haslett
Last Updated: 06 Nov 2012
For the manufacturing industry, 2011 was a rollercoaster ride of emotions: production went up, then it went down, then it flattened out for a while, then it started to rise again… and indications are that 2012 will be no different.  Having risen slightly, Markit’s purchasing managers’ index dropped from 52 to 51.2 in February. Considering any figure above 50 indicates growth, that’s still positive. But the fact that growth has contracted isn’t a particularly good sign…

Unfortunately, it looks like the fall in growth was largely caused by inflation – an upsurge in prices of raw materials like chemicals, metals, oil and transport, the cost of which rose at its steepest rate in more than 19 years. Ouch. Markit was keen to point out that manufacturers only passed on a ‘small proportion’ of that rise in costs on to consumers – although if things carry on like this, they’ll understandably have to start increasing prices. As Markit economist Rob Dobson put it, ‘if this combination of rising costs and weak demand persists, sustaining output growth and job creation will become increasingly difficult’.

There was some good news. For a start, manufacturers were hiring at their fastest rate in February since June last year, so the number of jobs available in the sector were on the rise. And although new orders were relatively flat, manufacturers reported that they had started sending more business to the US and Asia, thereby reducing their exposure to economically dodgy eurozone countries. So that’s a relief.

Manufacturing makes up 10% of GDP, so its fate is watched closely by the rest of the market. The worry is that if orders in the sector start to contract, there’s a good chance the economy will end up in a second consecutive quarter of contraction – at which point, we all have to start using the dreaded ‘R’ word again. It’s every politician’s worst nightmare…

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