U.K. manufacturing sector continued solid recovery in June

Markit Research

The United Kingdom manufacturing sector continued its solid recovery in June. Output and new orders rose at robust rates, encouraging manufacturers to increase employment at the quickest pace since February 1995. However, growth of new export orders eased sharply and there were reports that pressure on global supply chains had disrupted production and delivery schedules, and driven input prices higher.

The seasonally adjusted Markit/CIPS U.K. Manufacturing Purchasing Managers’ Index – which is calculated from data on new orders, production, employment, supplier performance and stocks of purchases – posted 57.5 in June, down only slightly from the 15.5-year highs of 58.0 reached in April and May. The PMI has signaled an improvement in operating conditions in each of the past nine months.

Manufacturing production rose for the thirteenth consecutive month in June. Although the rate of expansion eased to a five-month low, it was only slightly less marked than March’s 15.5-year high. Higher output reflected improved demand and efforts to reduce backlogs of work.

June saw the level of incoming new orders increase for the 12th straight month, as manufacturers benefited from successful promotional campaigns and stock rebuilding at clients. Anecdotal evidence suggested that domestic demand remained solid. In contrast, growth in new export orders – a key support to the recovery in recent months – downshifted markedly.

New export business posted only a marginal increase in June, after growth had hit a series record high only two months earlier. Improved demand was reported from Asia and the United States. However, some firms indicated that the fragile recovery in the Eurozone and recent strengthening of the exchange rate against the euro had impacted on sales to mainland Europe.

Manufacturing employment increased for the third month running in June and at the fastest pace in over fifteen years. Jobs growth was broad-based by sector, with higher staffing reported by producers of consumer, intermediate and investment goods. Firms linked higher employment to increased production and rising backlogs of work. Some also mentioned that, as the recovery took hold, it had been necessary to raise capacity following the substantial reductions initiated during the downturn.

On the prices front, input costs and output charges continued to rise at sharp rates in June. Manufacturers reported higher purchase prices for a range of inputs including chemicals, food products, metal, paper and timber. The increase in costs reflected supply chain factors, as highlighted by a further historically marked lengthening in average vendor lead times. Part of the increase in costs was passed on to clients. Subsequently, average selling prices rose for the eighth successive month and at a rate close to May’s 20-month high.

Rob Dobson, senior economist at Markit and author of the U.K. Manufacturing PMI, said: “June PMI data signal that growth of U.K. manufacturing production in the second quarter of 2010 was sustained at an average pace close to the 1.2 percent first-quarter gain reported by the official figures. The rate at which the sector has been recouping the output lost during the recession has been nothing short of remarkable, with around one-third having been recovered by the end of June. The manufacturing labor market appears to be moving more firmly into recovery position, with June seeing jobs added at the fastest pace since 1995. However, the latest survey offered signs that conditions may have passed their peak, as indexes for output and new orders have tapered off in recent months. Growth of new export orders has also downshifted sharply since the survey record growth seen in April, as the fragile Eurozone recovery and sliding euro exchange rate hit sales. With the impact of austerity measures on demand – both here and abroad – still unknown, the latter half of the year may provide a real test for the sustainability of the recovery.”

Commenting on the report, David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: “It’s been a tense month for the U.K. manufacturing sector. The sector maintained strong momentum in June but looming headwinds are causing some insecurity. All eyes will be peeled to see if the sector can carry forward this strong pace in the second half of the year. “We’re already starting to see the turbulent Eurozone make its mark which is causing unease given that export orders arguably led the sector out of the recession. Further uncertainty has been reflected with cautious suppliers unwilling to restock despite demand outpacing the supply of materials, creating a seller’s market. In addition, although we’ve seen employment levels peak again, this is very much a lagging indicator and it’s too early to say if this will be maintainable. The only thing clear at the moment is that manufacturers will certainly have to work hard to outstrip competition and secure future business wins if this pace of recovery continues and provides much-needed stability.”

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