UK manufacturing activity spikes to three-year high
UK manufacturing activity was much stronger than expected in April, according to a survey published on Tuesday, as companies restocked rapidly as input price pressures remained high but continued to retreat from their peak.
April's manufacturing purchasing managers' index from IHS Markit and CIPS unexpectedly leapt to a three-year high of 57.3 having dipped to 54.2 in March, with most economists forecasting another modest fall.
With a PMI reading above 50 indicating growth, this was the manufacturing sector's ninth month of expansion in a row since the decline in the post-referendum month of July.
Economists noted that the improvement in Markit’s survey brings it back in line with a rival survey from the CBI, which did not show a deterioration in the first quarter.
Manufacturing production expanded at the fastest pace in three months, Markit said, with the strongest growth coming in the investment goods sector, followed by the intermediate goods category.
Inflows of new work reached the strongest level since January 2014, with the new order index rising to 60.7 from the prior month's 55.4, mostly driven by the domestic market.
The output prices balance edged even higher to 61.8 in April, from 61.7 in March, while input prices materially weakened for the third consecutive month.
"Although price pressures remain elevated, input cost inflation has eased significantly since hitting a record high in January," said Rob Dobson, a senior economist at Markit.
He said the big question was whether the growth spurt can be maintained in light of ongoing market volatility and a number of political headwinds at home and abroad.
"Other surges seen since the middle of last year have generally proved short-lived, as weak wage growth sapped consumer spending. If this happens again it will inevitably constrain manufacturing, even as the investment and intermediate goods producing sectors continue to expand.”
Duncan Brock from the Chartered Institute of Procurement & Supply said suppliers were struggling to keep up with demand, with delivery times for raw materials increasing for the twelfth successive month and signs emerging of shortages for both metals and plastics.
"With input costs rocketing upwards, some manufacturers are beginning to stockpile raw materials to protect against future price rises. So long as sterling’s buying power remains weak, however, consumers should prepare themselves for higher prices,” he said.
This factor threatens to choke off demand, said economist Sam Tombs at Pantheon Macroeconomics, noting that the output prices balance remained in the top 10% of all past readings since 2000.
"When the output prices balance has been this high in the past, growth in output usually has weakened over the following six months," he said, adding that other surveys were suggesting manufacturers are investing less, despite the near-term strength of demand, due to uncertainty about post-Brexit trade ties.
"The recovery in the manufacturing sector, therefore, might quickly run into capacity constraints, ensuring that Britain doesn’t capitalise on the lower pound."
Barclays said the peak of cost pressures "appears firmly behind us" and felt there could be "some firmness in output prices as firms continue to try and pass through recent highs in input prices, although eventually these too should fade providing that input prices continue to descend".
But for now manufacturers are in a sweet spot, enjoying export benefits from the depreciation in sterling along with free access to the EU, .
"The pound has fallen because Britain is leaving the single market, but exporters still have tariff-free access to the EU as before," said Neil Wilson at ETX Capital. "The result is further growth in demand from Europe."
"Of course once you lose access to the single market suddenly things don’t look so rosy and this buoyancy in the manufacturing sector could start to deflate and we may need to see further depreciation in sterling to offset. The good news is that we are seeing higher demand from North America, Africa and Brazil."
Domestic demand and export competitiveness is not likely to last, said Barclays.
The impending increase in inflationary pressures, with real incomes being squeezed and the likely weakness in unsecured credit growth ahead could weigh on the consumer sector.
"Likewise, competitiveness gains could gradually erode over time likely leading all sectors to return to caution during the course of 2017 as negotiations between the UK and the EU27 begin, and some start adjusting their operations.
"Against this backdrop, we believe firms’ optimism related to improvement in domestic demand is likely exaggerated while there is only so much they can expect with regard to foreign demand, particularly as many export driven firms are import intensive."