Sector posts sixth month of expanding output despite record rise in costs, which are expected to increase further over 2017
A record rise in the cost of imports in January has taken the shine off a strong performance by the manufacturing sector, which has rebounded since the Brexit vote to record its sixth consecutive months of expanding output.
Manufacturers were forced to hike the cost of their goods by one of the widest margins in one month after the slump in the pound triggered a record rise in the cost of imports, according to the Markit/Cips purchasing managers survey.
The rising cost of imports is expected to push up the price of UK-made goods over the coming year and send inflation from 1.6% to nearer 4%.
Bank of England policymakers are expected to highlight in their quarterly inflation report on Thursday that price pressures in the economy are growing, especially in the manufacturing industry because the sector relies heavily on raw materials and components brought in from overseas.
Car firms have warned the government that the fall in sterling against the dollar and the euro might not be enough to persuade them to continue investing in the UK if they face tariffs and higher regulatory costs on imports and exports to the European Union. Other industries with overseas suppliers are also known to be lobbying to stay inside the single market and maintain access to EU markets tariff free.
Nevertheless, UK manufacturing enjoyed an increase in new orders and the fastest rise in activity since May 2014.
The purchasing managers’ index (PMI) slipped below December’s two-and-a-half-year high of 56.1, but the small dip still left overall figure, at 55.9. A reading above 50 indicates expansion.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said it was worrying that manufacturers were increasingly reliant on domestic demand, which could fade away once price rises feed into the supply chain.
“The recovery in the manufacturing sector lost a little pace and narrowed to become almost exclusively dependent on domestic demand in January,” he said.
“The new export orders balance collapsed to 50.9 in January – its lowest level since May – from 58.5 in December. This emphatically shows that the benefits to manufacturers from sterling’s depreciation remain far too modest to outweigh the costs for the rest of the economy in terms of high inflation.”
Tombs warned that the recent strong figures could prove to be a high watermark. “Domestic demand faltered the last time producers increased prices this quickly in 2011, and we doubt that this time will be different,” he said.
Lee Hopley, chief economist at EEF, the manufacturers’ organisation, said the survey told “a positive story about the sector”, with the all the important output and orders components remaining firmly in positive territory.
She said inflationary pressures represented a cloud on the horizon and “presented some risks to the resilience of the UK market later this year”.
But Hopley was more upbeat about the industry’s immediate prospects. “Rather than this being a case of the PMI defying gravity, the expansion in activity is being driven by more upbeat conditions at home and [by] demand in global markets [being] on a more stable footing than businesses have seen for some time. Additionally, there’s some extra help fromsterling’s depreciation,” she said.
Source: Guardian