UK manufacturing growth disappoints but remains in growth mode

UK manufacturing output remained solid in March but dipped to a four-month low, a closely watched survey revealed on Monday.

The manufacturing purchasing managers' index from Markit and the Chartered Institute of Procurement & Supply (CIPS) reading for March eased slightly to 54.2 from February's newly revised reading of 54.5. A reading above 50 for the PMI index indicates growth.

This was short of the consensus forecast of 55.0 and was the third month in a row that the index has fallen.

Manufacturers continued to take on more staff to handle the growth, with headcounts rose for the eighth month running, with the pace of jobs growth improving to its fastest in almost a year and a half.

Markit said domestic demand market was a key source of new business wins, while the weakness of the pound continued to make exports more competitive and boost new work inflows, though to a lesser degree than in recent months.

The rate of increase in manufacturing production slipped to its weakest during the current eight-month period of expansion, with the slowdown centred on consumer goods producers, though output continued to grow modestly.

On the other side of the coin, the intermediate and investment goods sectors both registered substantial and accelerated rates of increase.

The survey data suggested manufacturing will contributed a smaller dollop to UK gross domestic product in the opening quarter compared to the buoyant 1.3% rise seen in the fourth quarter of last year.

“With growth losing further momentum in March, that weaker trend is likely to continue into the second quarter," said Rob Dobson, senior economist at the the survey's compiler IHS Markit.

"The latest survey also clearly shows that high costs and weak wage growth are sapping the strength of consumers, with rates of expansion in output and new orders for these products slowing further.

He added that the impact of the exchange rate was still being keenly felt by manufacturer's on their cost base, with purchase price inflation still not far from January's long-term high.

“The pass-through of these costs means selling price inflation remains stubbornly high. Inflation hawks at the Bank of England will be keeping a close eye on these price pressures to see if they remain contained or begin to pose a greater risk to
consumer prices, and consumer spending, in the medium term,” Dobson said.

Paul Hollingsworth at Capital Economics agreed that the sector saw a modest slowdown in the first quarter but said the bigger picture was that the sector is still performing well by recent standards.

"The quarterly average output balance now points, on the basis of past form, to quarterly growth in the official measure of manufacturing output of a bit below 1%, following a 1.2% rise in the fourth quarter," he said.

"It suggests that growth lost some momentum over the course of the quarter, setting a low base for Q2."

However, he pointed out that the CBI's industrial trends survey has been a little more upbeat recently, and he continued to expect manufacturers to reap the benefits of the lower pound and stronger global trade.