U.K. manufacturing PMI reaches highest level since October 1994

The seasonally adjusted CIPS/Markit Purchasing Managers’ Index (PMI) for United Kingdom manufacturing rose to 57.2 in March, up from 56.5 in February, its highest level since October 1994. The PMI has remained above the no-change mark of 50.0 for six successive months.

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

Output rose for the 10th consecutive month in March. The rate of increase accelerated to its highest since July 1994 and the second-fastest in the 18-year survey history. Gains in production reflected improving economic conditions, increased intakes of new work and efforts to reduce backlogs.

New orders rose for the ninth month in a row during March, with the rate of expansion only slightly slower than January’s six-year peak. Companies reported solid demand from both domestic and overseas markets, which they attributed to the recovery in global conditions, the launch of new product lines and clients rebuilding inventories.

The recovery in the manufacturing sector remained broad-based by product category. The sharpest increases in output and new orders were seen in the intermediate goods sector. SMEs and large-sized enterprises also saw marked gains in both production and new work received.

March data signaled an increase in new export orders for the seventh straight month. Although the increase was less marked than February’s series record high, it was still among the fastest since exports data were first collected in 1995. There were reports of increased sales to clients in mainland Europe, China, the United States, Brazil, the Middle East, South Korea and Taiwan. The weak sterling exchange rate was cited as a factor aiding export competitiveness.

Staffing levels declined slightly in April. Job losses were attributed to cost cutting initiatives, workforce restructuring and redundancies. However, companies maintained sufficient capacity to cope with the dual requirements of work on new and existing contracts. This was highlighted by a further modest reduction in backlogs of work, although the rate of decrease was much slower than the series average.

Higher levels of production encouraged some firms to increase their buying activity in March. There were also reports that low stocks holdings were necessitating some purchases. Inventories of purchases fell only slightly as a result. Higher demand for raw materials led to a further marked increase in average vendor lead times.

Cost inflationary pressures continued to build in the U.K. manufacturing sector during March. Purchasing costs rose at the fastest pace since September 2008, with reports of higher chemicals, food, fuel, metal, timber and utility prices. Meanwhile, although the rate of inflation in selling prices was the quickest in seventeen months, it was still well below that for costs.

Commenting on the report, David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “To see such a fast paced recovery in the manufacturing sector is hugely encouraging. Exports are clearly a main driver of growth but we are also seeing recovery across the whole sector. Strong growth in the intermediate goods sector should filter through to consumer and investment goods producers in the coming months, boding well for the sustainability of the upturn. Expansions were also reported across all business sizes suggesting that this is as much a balanced as it is a resilient recovery. However, even at this level of bounce back, there is still a long way to go before manufacturing returns to pre-recession levels. Though there was a slight cut in employment, purchasing managers said these were mainly confined to larger firms and weren’t as much a reflection of dampened demand as much as an effort to reduce operating costs.”

Rob Dobson, senior economist at Markit, said: “March PMI data round off a solid start to 2010 for the U.K. manufacturing sector. The headline PMI hit its highest level since October 1994 and output rose at the second-fastest pace in the survey history. The rebound is also coming from a broad-base by sector and company size, raising hopes that this will prove sustainable. Rates of growth in total new orders and new export orders remained elevated, with export competitiveness aided in March by the weak sterling exchange rate. However, the recovery is still in its infancy and levels of output and demand remain well below their pre-recession peaks. Although manufacturing job losses were recorded in March, this was mainly centered on large enterprises. SMEs, in contrast, reported higher staffing levels.”