UK manufacturing output continues to expand, input prices surge

UK manufacturing output expanded in January for the sixth straight month, as expected, but price pressures intensified with input cost inflation surging a record high.

The Markit/CIPS manufacturing purchasing managers' index for January fell to 55.9 from December's two-and-a-half-year high of 56.1, exactly in line with forecasts.

Thanks to a solid increase in new orders, Markit said output rose at the fastest rate since May 2014.

However, rising inflation pressures were apparent as input cost inflation surged to a survey record high and output charges rocketed at one of the steepest rates in the history of the PMI series.

While overall new orders and export orders indices turned down, the input price balance rose sharply, from 77.7 in December to a record high of 88.3, which will increase pressure on firms to raise prices,

This will dampen domestic demand for manufacturing goods, said Ruth Gregory at Capital Economics, though she was optimistic that manufacturers will fare better in 2017 than last year.

"The three-month average of the survey’s output balance is consistent, on the basis of past form, with very healthy quarterly gains in manufacturing output of nearly 2%, following growth of just 0.3% in 2016 as a whole. As such, this adds weight to our view that the manufacturing sector will fare better in 2017 than it did in 2016.

With the forthcoming rise in inflation set to hit the recently strong-performing consumer services sector, Gregory said this could result in a rare period of outperformance of the manufacturing sector over the services sector this year.

Global growth

UK manufacturers joined the rest of the world in making a strong start to the year, with Japan’s factory growth surging to a three-year high, China’s at its best level in two years, German factory output growth at its highest in three years, France's close to a six-year high, and even Italy managing to record a healthy pace of expansion.

Some analysts saw this as evidence that the world economy was perhaps entering a renewed phase of expansion.

"Buoyed by the prospects of a reflationary US economic policy under president Trump, it looks like manufacturers are ramping up activity," said Neil Wilson at ETX Capital.

He noted that input prices were rising at the fastest pace in years.

"This is true for Europe and Japan and signals that the experience of UK manufacturers, which have been reporting rising cost pressures for many months, is not unique. The effect of sterling weakness is the key cause but we must also consider the rebound in oil prices in December and January as a significant factor," he said.