UK manufacturers enjoy slight rebound thanks to foreign demand

UK manufacturing activity picked up in recent weeks thanks to strongest growth of new export orders in seven years.

Markit's manufacturing purchasing managers' index for July rebounded to 55.1 from 54.2 a month before, ahead of consensus estimate of 54.5 but still below its average of the first half of the year of 55.3.

This was the first rise in the UK manufacturing PMI in three months and only partly reversed its fall in June as a stronger flow of new work combined with higher levels of production and a rise in job creation.

New orders rose slightly thanks to the strongest rise in foreign demand since April 2010, while domestic orders remained positive but a smaller degree compared to earlier in the year. The new orders balance rose to 56.4 from 54.3.

Manufacturing production increased for the twelfth successive month but at its lowest rate since March.

The consumer goods sector saw the strongest increase in output, followed closely by intermediate goods producers, though the output balance edged down to 55.6 in July, from 55.9 in June.

The survey remains consistent with only modest growth in manufacturing output that will provide insufficient compensation for the slowdown in the consumer sectors of the economy, said economist Samuel Tombs at Pantheon Macroeconomics, who noted that stocks of finished goods accumulated for the third consecutive month, meaning the pickup in orders won’t feed though fully to production over the coming months.

Tombs took some small encouragement by the export boost and said: "The export orders balance tends to lead the official export output data by about six months, so the balance tentatively suggests that net trade will finally start to support GDP growth around the turn of the year. Any trade boost, however, likely will be modest, given the huge disincentive to invest in extra capacity to export more when Britain’s future trade ties are so uncertain."

Scott Bowman at Capital Economics was more positive, feeling the PMI suggested growth in the sector has accelerated after the disappointing performance in the second quarter, with the three-month average of the survey’s output balance consistent with a quarterly gain in manufacturing output of almost 1% – well above the 0.5% contraction reported in the first estimate of Q2 GDP.

"Admittedly, the PMI overestimated manufacturing sector growth in Q2. But we think this was partly because the survey under-represented the weakness in volatile pharmaceutical output – which seems likely to rebound in Q3," he said.

"In addition, the fall in the output price balance of the PMI to its lowest level since September 2016 suggests that the peak of sterling’s pass-through to higher prices has now passed. And the rise in overall new orders was driven by an increase in export orders to the highest since April 2010, as the fall in the pound continues to provide a boost to external demand."

Lee Hopley, chief economist at manufacturing trade body the EEF, said the sector appeared to be riding high thanks to the recovering global economy and efforts to bring new products to market.

"Above-trend responses across the key components of the survey would signal that the drag on overall economic growth from the sector in the second quarter of this year is likely to be temporary," she said.

"While this is positive news for the UK’s growth outlook, at least in the short-term, it doesn’t make the MPC’s balancing act any less tricky this week. Some comfort will, however, come from further signs that cost pressures on the supply chain are easing and the pass through to consumers should be on the wane."