Factories crank up production despite sluggish domestic demand

MANUFACTURERS saw a slight bounce in output in May, raising hopes that the economy has escaped the slow patch in the opening months of the year.

Last month factory output grew at the strongest pace so far this year. The relevant segment of IHS Markit’s purchasing managers’ index – an influential private sector survey – hit 56.9 in May, up from 55.4 in April and well above the 50-level which denotes no change on the month.

However, domestic demand remains sluggish. Much of the extra output has gone into rebuilding stockpiles of goods, rather than being sold to customers. The stock-building component of the PMI rose to 53.4, indicating the fastest growth in the index’s 26-year history.

Growth in new orders also slowed, with that component of the PMI slipping from 61 back in November to 54.7 in May. Employment growth has also ground almost to a halt, with its index down from 51.3 in April to 50.6 last month. This is down from a far more healthy 55.1 in November 2017.

At the same time input price inflation picked up again after several months of decline, while output prices continued slowing. This means that the margins of firms are potentially being squeezed. As a result the headline PMI figure, looking at overall business activity, climbed more modestly from 53.9 to 54.4 in May.

“Given that we are seeing a similar picture in major European markets and the advent of escalating trade tensions it seems likely that UK manufacturing will stay on this slowing trajectory in the second half of the year,” said Lee Hopley, chief economist at industry group EEF. “But to complicate matters for monetary policymakers, price pressures have re-emerged as commodity prices have picked up in recent months. All in all, the survey is still pointing to modest manufacturing growth in the second quarter, but we’re some distance from the pace of acceleration seen just six months ago.”

Howard Archer, chief economic adviser to the EY Item Club, said the disappointing growth may have implications for interest rates. The weak data “will do little to inspire confidence at the Bank of England that the economy is bouncing back significantly in the second quarter”, he said.

“Consequently, the Bank of England looks highly unlikely to raise interest rates at the next meeting of the MPC in late June.”