U.K. industrial output grew at fastest pace since September 1996

The United Kingdom manufacturing sector continued its solid recovery in February. The headline seasonally adjusted CIPS/Markit Purchasing Managers’ Index (PMI) posted 56.6, unchanged from January’s 15-year high. The PMI has remained above its neutral level of 50.0 for five successive months.

The headline Manufacturing PMI is calculated using data collected on new orders, production, employment, supplier performance and stocks of purchases.

Manufacturing production increased for the ninth consecutive month in February, with the rate of growth accelerating to its fastest since September 1996. The latest expansion was broad-based by both sector and company size. Capital goods was the best performing market group, while growth amongst SMEs was slightly stronger compared to large sized firms.

Underpinning the latest expansion of output was a further substantial gain in new orders. February saw new work received rise for the eighth month in a row, with marked gains reported in the capital, consumer and intermediate goods sectors.

Companies reported improved new order flows from both the domestic and export markets. Total new business rose at a rate close to January’s six-year high, reflecting successful product launches and clients rebuilding their inventories. Meanwhile, growth of new export orders accelerated to its fastest since at least January 1996 (when data on new exports were first collected). Gains in new exports were linked to higher sales in the US and Asia, supported by improving global market conditions and the ongoing weakness of sterling.

Employment rose for the second month in a row in February, although the rate of increase stayed only marginal. The latest expansion of staffing levels was led by increased hiring at SMEs. Higher employment was linked to growth of output and new orders. Meanwhile, backlogs of work fell at the slowest pace since July 2007, suggesting that capacity was moving closer in line with current requirements.

Despite easing over the month, the rate of growth in purchasing activity during February was still the second-strongest since November 2007. Companies reported that this reflected rising levels of production and efforts to guard against future price increases. Stocks continued to be depleted, however, with holdings of both raw materials and finished products lower than in the previous month.

Inflationary pressures continued to build in the U.K. manufacturing sector, with rates of increase in input costs and output prices the highest since September 2008 and October 2008 respectively. Higher costs reflected supply-chain factors – as exhibited by a further marked deterioration in average vendor performance – and higher commodity, energy, metal and paper prices. Cost inflation was strongest in the Timber & Paper and Chemicals & Plastics sub-sectors.

Commenting on the report, David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “The manufacturing sector seems firmly back on the road after this severe recession. It’s particularly positive that the recovery is broad-based and being partly driven by new order growth rather than just restocking. We’re really seeing signs that seem to point toward a full sector recovery. Most notably, companies reported that higher demand from export markets wasn’t just on the back of the softer sterling but also improving global market conditions. Meanwhile there were mentions that many production lines, which ground to a halt at the height of the recession, kicked into action again. Good news was also reported on the job front as firms – mainly SMEs – hired staff for the second consecutive month in line with increased levels of production. There are, of course, some concerns looming on the horizon. Not only are supply-chain factors continuing to raise inflationary pressures, such as higher commodity, energy, metal and paper prices, but further anticipated fiscal tightening, coupled with the revised VAT rate, are expected to make long-term impacts on the sector.”

Rob Dobson, senior economist at Markit, said: "The February PMI continues a promising run of data for U.K. manufacturing. The headline PMI remained at January’s 15-year peak, while the output index hit its highest level since September 1996. The PMI survey, therefore, suggests that the good news provided by the surge in output reported by the Office for National Statistics in December will have continued in early 2010. Manufacturing growth is still being supported by the rebuilding of inventories, which is providing a short-term boost. A PMI survey record rise in new export orders also indicates that exporters are taking advantage of sterling's weakness to sell competitively in overseas markets as global market conditions improve. Even more encouraging are the growing signs that business-to-business and investment spending are recovering, which points to a more sustainable and broad-based recovery."