UK manufacturers benefit from stockpiling for no-deal Brexit

UK manufacturers reported an uptick in activity for the last month of 2018 as customers stockpiled to prepare against a potential no-deal Brexit.

The IHS Markit/CIPS manufacturing purchasing managers' index rose to a six-month high of 54.2 in December from 53.6 the month before, well above the 52.5 the market expected.

A rise in new orders was key to the improved headline PMI. Manufacturers indicated the highest level of new orders since February, which was said to reflect stockpiling by clients at home and abroad in order to minimise disruption in the event of a no-deal Brexit.

"Any positive impact on the PMI is likely to be short-lived, however, as any gains in the near-term are reversed later in 2019 when safety stocks are eroded or become obsolete," said Rob Dobson a director at IHS Markit.

Preparations for a no-deal Brexit drove the fourth-fastest rate of input buying in the survey's 27-year history, while stocks of finished goods rose at the second steepest pace during that time.

Otherwise, output for the fourth quarter was the lowest in five years, with output growing in December but at a slower pace. Manufacturers confidence about output for the coming 12 months was only slightly above November's 27-month low.

On the positive side, growth of new orders picked up to a ten-month high as new work strengthened from both domestic and export markets.

Input cost inflation eased to a two-and-a-half year low, while output charge inflation rose to a three-month high, mainly reflecting the pass-through of higher input costs to clients.

Despite the six-month high for the headline index, the data still suggests that the sector stagnated inthe fourth quarter, said economist Andrew Wishart at Capital Economics, as the output balance, which has the best relationship with the official measure of manufacturing output, averaged 52.5 in the final three months of the year, consistent with flat manufacturing output.

Samuel Tombs, an economist at Pantheon Macroeconomics, said the pick-up in the PMI "suggests that preparations for Brexit are helping manufacturers to keep their heads above water during the current global slowdown".

If the government averts a no-deal Brexit, Tombs believes any revival in manufacturing output in the second quarter will be sluggish "because producers simply will run down stocks".

"As a result, December's PMI doesn’t alter our view that the manufacturing sector will struggle over the coming months and that GDP growth will be well below-trend in Q4 and Q1; we expect quarter-on-quarter growth of 0.2% and 0.3%, respectively."