UK Manufacturing Still Growing Despite Cost Pressures

The UK manufacturing sector continued to grow in October, with the latest IHS Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) increasing from September’s figure of 55.9 to 56.3.

The latest reading marks the 15th consecutive month of growth for UK manufacturing. New orders and output growth remain strong and continue to grow despite increasing cost pressures on the sector. Growth has come in the form of increasing exports and domestic demand, supplying a steady stream of new orders to the sector.

Growth has been consistent across the industry, including consumer, intermediate and investment goods. The intermediate and investment sectors have seen particular acceleration in production and new orders. The consumer sector is still reporting growth, but rates have slowed and business optimism is the lowest for the year. Over half of the manufacturers surveyed expected higher output in the coming year, with 8% expecting this to fall.

While the bulk of new business came from domestic orders, exports continue to rise, albeit at a slower pace. More new work is coming through from the USA, South America, Australia and Europe. The weakness of the Pound will undoubtedly have an influence here. With Sterling regaining a degree of strength, there may be pressure on export growth in the months ahead.

With new business and production continuing to pick up the pace, employment growth is at over a three-year high.

Despite a positive outlook and continued growth for UK manufacturing, cost pressures continue to build. Selling price inflation is now at the highest level for six months and input costs are rising at the fastest for seven months.

Expert Opinion

“These latest results reflect a reasonably positive picture for the manufacturing sector and provide some grounds for optimism for the final quarter of 2017. There are however some concerns for 2018, with inflationary pressures and ongoing uncertainties about the direction of Brexit negotiations.

“The Government now has the opportunity to ensure the momentum in the sector isn’t lost. Greater clarity with regards to the UK’s industrial strategy is important and we also look forward to the Budget later this month where the Chancellor has the opportunity to encourage greater investment.”
Laurence Gavin - Partner

David Johnson, founding director at currency specialist, Halo Financial, added: “It’s good to see increasing exports again this month, despite a slowing rate of growth in this area, which likely reflects an undervalued Pound and political uncertainty in the UK, Europe and US. 

“Once again, cost pressures are being felt across the industry, increasing at pace. It’s always important for manufacturing businesses to look at opportunities to mitigate the risks posed by these growing inflationary pressures. Factors that will continue to put these costs up include exchange rate volatility, overseas demand and a recovery in some areas of the commodity markets.

“The strong performance of manufacturing businesses at the start of the final quarter of the year, measured alongside rising inflation in the sector, could add more impetus to the Bank of England’ decision tomorrow and may tip the balance towards raising interest rates. That would strengthen Sterling and put pressure on export sales."