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UK manufacturing beats forecasts with strong growth in August – The Guardian

Britain’s manufacturers increased production at the fastest pace in seven months in August, taking on more workers to keep up with strong domestic and international demand.

The closely watched Markit/Cips UK manufacturing PMI barometer of factory sentiment showed activity jumped to 56.9 last month from 55.3 in July, the second-highest level in more than three years, helped by the weak value of the pound.

That confounded forecasts for a modest slowdown to 55.0 in a Reuters poll of economists and was well above the 50 mark that separates growth from contraction.

The weak pound, having plunged after the Brexit vote, was reported to have increased competitiveness for British products. The domestic market, however, was the prime source of contract wins for the manufacturing sector, despite robust demand from mainland Europe, the US, China and Australia.

Lee Hopley, chief economist at manufacturers’ organisation EEF, said: “UK manufacturers are looking beyond the Brexit negotiations to strengthening market opportunities in Europe and beyond, with the acceleration in manufacturing activity in August helping to provide some welcome offset to sluggish consumer demand at home.”

The jump in production was underpinned by faster intakes of new work, which filtered through to the labour market as the number of jobs grew for the 13th straight month. However, almost 31% of companies said they experienced an increase in the price of materials required for their operations, generally linked to the rising cost of commodities.

Despite the strong performance in August, there may be trouble brewing. The survey of more than 600 industrial companies found higher raw materials and staff shortages could lie ahead, which would hit the pace of production in future and lead to higher costs.

Rob Dobson, a director at IHS Markit, said: “At the moment, the survey data suggests the manufacturing economy remains in good health despite Brexit uncertainty, and should help support ongoing growth in the economy in the third quarter.”

The survey provides a snapshot of the UK economy before official figures are released later in the year, meaning the expectations for faster growth may fail to materialise.

Manufacturing contracted by 0.6% in the three months to June, despite the PMI data pointing to an expansion of about 0.5%, according to Andrew Wishart, an assistant economist at the consultancy Capital Economics.

The survey results “add weight to our view that the sector will put a disappointing first half to the year behind it”, he said. “We expect the manufacturing sector to help overall GDP growth to accelerate in the second half of 2017.”

The upbeat survey could give credence to policymakers calling for the Bank of England to raise interest rates to offset higher inflation, arguing the economy is now strong enough to handle tighter monetary conditions. Michael Saunders, one of the two dissenting Bank of England rate-setters to vote for a rise last month, made another call for an increase in a speech in Cardiff on Thursday.

The manufacturing figures reflect activity in a sector that contributes about 10% to GDP, although uncertainties remain in other areas. Consumer spending is under pressure as higher prices and weaker wage growth squeeze their purchasing power. Caution has been recorded among businesses considering investments in the British economy amid political and Brexit uncertainties.

The improved picture for manufacturers was also mirrored in Europe, even though a steep climb for the euro has eroded competitiveness on the continent. Production in the eurozone accelerated in August, as manufacturers recorded the fastest rise in export orders since February 2011, according to separate figures on Friday.

IHS Markit’s manufacturing PMI for the eurozone rose to 57.4 in August, up from 56.6 in July. Those levels of productivity should indicate “solid support” for the eurozone in the third quarter, according to Claus Vistesen at research consultancy Pantheon Macroeconomics.

The stronger picture on the continent could encourage the European Central Bank to begin cutting its €2.3tn (£2.11tn) bond buying programme. Mario Draghi, the ECB president, could take such steps at a key meeting later this month.

UK manufacturing beats forecasts with strong growth in August – The Guardian

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