UK manufacturing output improves but supply-side issues loom

UK manufacturing activity surprisingly strengthened in August to its second best level in three years as output, new
orders and rates of hiring all improved.

Markit's purchasing managers' index for last month rose to 56.9 from the 55.1 a month before and above the 55.0 consensus expected by analysts.

The PMI has remained well above the 50 mark that indicates growth for 13 months in a row now.

Production rose at the steepest pace in seven months, Markit said, underpinned by faster intakes of new work received, while rates of expansion in both were among the best since mid-2014.

With all manufacturing sectors benefiting, the domestic market was said to be the prime source of new contract wins, though new export business remained "robust" but not quite at July’s near-record high.

Helped by the weakness of sterling, manufacturers enjoyed increased business from mainland Europe, the USA, China and Australia, while job creation continued for the thirteenth straight month and at the quickest rate since June 2014.

The PMI data agrees with the CBI’s latest monthly industrial trends survey in pointing to the increasing health of the sector with stronger total order books and export orders but both upbeat results show an improvement on the latest Office for National Statistics data for the second quarter, which showed a decline in manufacturing output.

Manufacturing contracted by 0.6% in the quarter in contrast to the output balance of the PMI pointing to an expansion of around 0.5%.

Rob Dobson, Director at IHS Markit, said it was looking "increasingly likely during the near-term" that the strong momentum would continue, given the breadth of the expansion and with business confidence rising to one of its highest levels in over a year.

“There are increasing signs of supply-side issues leading to raw material and staff shortages, which could become a constraint on output growth going forward, while also leading to higher costs.

"However, at the moment, the survey data suggest that the manufacturing economy remains in good health despite Brexit uncertainty, and should help support on-going growth in the economy in the third quarter, which will add fuel to hawkish policymakers’ calls for higher interest rates.”

The broad strength of the survey adds weight to economist Andrew Wishart at Capital Economics' view that the sector will put a disappointing first half to the year behind it.

On the basis of past form, he said the output balance was consistent with quarterly growth of about 1.0% in the sector, also noting that the input prices balance reversed some its previous decline reflecting the recent slide in the pound.

"Of course, the manufacturing PMI has pointed to much stronger manufacturing output growth than has been reported in the hard data for some time now," he said, suggesting the survey may have under-represented the weakness in volatile pharmaceutical output – which seems likely to rebound in Q3.

"What’s more, the PMI survey isn’t an outlier, with the CIPS Industrial Trends survey pointing to strong rates of growth too. As such, we expect the official figures to start to reflect the surveys’ optimism ahead. As a result, we expect the manufacturing sector to help overall GDP growth to accelerate in the second half of 2017."