UK manufacturing firing on all cylinders

Our manufacturing activity is growing at the fastest rate since records began. Nice to have some positive news for once...

by Dave Waller
Last Updated: 06 Nov 2012
The Chartered Institute of Purchasing and Supply has just published its monthly purchasing managers' index (PMI) for the manufacturing sector: it shows that, in January, activity expanded at the fastest rate in the survey's 19-year history. That will go down a treat in Whitehall, since the Government is desperate to rebalance the economy, and activity elsewhere is muted, to say the least. Although could it mean an earlier rise in interest rates?

Let’s focus on the good news first. The PMI data showed a reading of 62 for the first month of 2011. The equivalent figure in December (even now it’s been adjusted upwards) was 58.7, and anything over 50 means that the sector expanded. So 62 is thoroughly positive. Manufacturers have been benefiting from healthier demand and improved competitiveness both at home and abroad, boosted by the weakness of the pound (as policy-makers hoped).

That’s reassuring. Not only is manufacturing an important part of our economy (hence all the Government attention) but its success is beneficial to the labour market too: employment in the sector also rose at the fastest pace yet recorded.

But there’s a catch: the data also showed inflationary pressures increasing. Factory costs surged to the highest level since the survey began in 1992, while output prices also grew – with the heavy increases in commodity costs being passed on down the supply chain. All of which means pressure on the Bank of England to increase the base interest rate will be growing too.

Last month, two members of the monetary policy commission voted to raise interest rates but were outgunned – and the shockingly poor Q4 GDP figures that emerged recently seemed to have put that argument to bed for the time being. However, we’re due similar PMI stats on the services sector on Thursday, and it’s possible that GDP figure could be revised upwards later this month. If that suggests our economic recovery has actually been slightly stronger than first thought, other members of the MPC may start thinking that it’s time to bite the interest-rate bullet.

But that’s a way off yet. For the time being, let’s enjoy the fact that Britain’s much-maligned manufacturing industry seems to be delivering the goods, just when the economy needs it to be.

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