UK manufacturing PMI pick-up 'far from convincing'

UK manufacturing activity last month was stronger than expected as firms worked through the backlog of work from earlier in the year, with supply-chain constraints and cost pressures intensifying.

The IHS Markit manufacturing purchasing managers' index rose to 54.4 in May from the 53.9 17-month low from a month before. The market had expected a slight fall to 53.5.

The reading is the first to beat consensus forecasts so far this year and ends a run of three disappointments in the past five releases.

An increase in the output index to 56.9 from 55.4 is consistent with quarterly growth in the official measure of output of around 1% in May, a big improvement on the 0.2% expansion in the first quarter and worth around 0.1 percentage point of quarterly GDP growth.

Growth in industrial output came as new business expansion slowed to an 11-month low, with the increased PMI reading coming from a steep build-up of finished goods inventories and a sharp reduction in backlogs of work built up during weather affected previous months.

An easing in new business growth reflected a softer increase in new work from the domestic market, the survey indicated, as demand from overseas strengthened slightly.

British manufacturers reported increasing cost inflation and supply-chain pressures, with average input prices accelerating for the first time since January, with raw material cost from higher oil prices also said to be pushed up by supply shortages. Moreover, average vendor lead times – a key bellwether of supply-side constraints – lengthened to the greatest extent seen so far in 2018.

Scratch beneath the surface and the rebound in the PMI from April’s 17-month low is "far from convincing", said IHS director Rob Dobson. “A slowdown in new order inflows meant the expansion in production was achieved only by firms working through their backlogs of work."

He said weaker than expected sales led to the largest rise in unsold stock in the PMI survey’s 26-year history.

"This suggests that manufacturers have yet to fully adjust their production to the weakening trend in new business growth and there will need to be a rapid improvement in demand if output volumes are to be sustained in the coming months. Manufacturers will also likely be constrained if the resurgence in both cost inflation and supply-chain pressures becomes more firmly embedded," he added, noting that price and supply headwinds, combined with a further slowdown in new order growth, could jeopardise any further expansion of the manufacturing sector.

David Cheetham, chief market analyst at currency broker XTB, said while the figure itself remains relatively weak in being the third lowest in the past 12 months, it still was better than expected and will raise hopes for next week’s more important services PMI release.

"The pound remains slightly lower on the week against the US dollar and is on course for a 6th weekly loss out of 7. You have to go back to last November to find a lower weekly closing price for this pair, although there have been some tentative signs of support in recent days with buyers stepping in to defend the 1.32 handle. "

The survey suggests the industrial sector is still growing at a decent pace, said economist Ruth Gregory at ​Capital Economics, though she admitted it was not all good news, with input prices surging. "This will clearly put more pressure on firms to raise their output prices which could dampen demand for manufacturing goods ahead. Overall, though, the figures suggest that the sector’s recovery has not run out of steam just yet."