UK and Global Manufacturing Activity Jumps but Also Point to Sharp Price Rises Ahead

UK manufacturers have reported a 'bumper' start to 2017 according to IHS Markit and the CIPS whose latest Manufacturing PMI report stands at 55.9 for January 2017.

Output growth for the sector now stands at a 32-month high as UK manufacturers join the rest of the world in posting a very strong start to 2017.

The latest expansion of manufacturing production was underpinned by a solid increase in new order intakes.

The domestic market was the prime source of new business wins in January. There was also a modest increase in new export orders, although the pace of expansion was noticeably slower than during the prior survey month.

This is interesting as - when balanced against the strong consumer demand dynamics of the UK - confirms that the economy is creating its own steam.

This is a big risk to those forecasters who say the UK will suffer a massive slowdown because of Brexit as we move through 2017.

“The sector was awash with optimism, recording an increase in new orders and the fastest rise in activity since May 2014. The domestic market led the way in the growth of new orders, alongside robust consumer, intermediate and investment goods production, to offset the softer expansion in export orders,” says David Noble, CEO at the CIPS.

Cost Pressures Grow

The other stand-out element of the report is that cost pressures have hit an all-time high.

“Input cost inflation spiked to the highest seen since data were first collected in 1992. Over 55% of companies link rising costs to the exchange rate,” says Rob Dobson, Senior Economist at IHS Markit.

However, Dobson is keen to point out that Sterling alone cannot be blamed for the pressures.

“We’re also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel,” says Dobson.

This kind of input price pressure points to higher rates for CPI inflation in 2017, which will hurt consumer spending.

However, this is not just a UK story.

“Across the board we are seeing input prices 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,” says Neil Wilson at ETX Capital.

Indeed, the new month has seen a slew of upbeat manufacturing PMIs from around the world, evidence perhaps that the world economy is 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,” says Wilson.

Japan’s factory growth surged to a three-year high, while China’s output growth hit its best level in two years.

The trend continues in Europe – France factory growth was close to a six-year high, while even Italy managed to record a healthy pace of expansion. German factory output growth was at its highest in three years.

Sweden’s manufacturing sector grew at its fastest pace in six years.

Spain’s expanded at healthiest clip since May 2015.

We’ve seen similarly upbeat numbers from Russia, Poland, Ireland and the Netherlands.

Greece’s output contracted with the PMI plumbing a 16-month low as poor weather hit.