Manufacturers in rude health but challenges remain

Latest PMI paints a largely positive picture though cost pressures weigh

Britain’s economy was given an unexpected lift yesterday after manufacturing output jumped to a four-month high, reinforcing the case for a tightening in monetary policy.

The closely-watched Markit/ Cips purchasing managers’ index (PMI) for the manufacturing sector showed a reading of 56.9 for August, up from 55.3 in July and above economists’ expectations of 55. Any reading above 50 denotes growth.

Activity rose to its secondhighest level in more than three years as production gathered pace despite overseas demand for British goods easing from a near-record high in July.

Firms were also feeling more positive, with business confidence reaching its highest level for three months, on the back of new product launches and the stronger global economy.

Rob Dobson, director at IHS Markit, said the manufacturing sector was in “good health” despite concerns over the impact of the Brexit vote, handing further evidence for Bank of England policymakers calling for a hike in interest rates.

Earlier this week, monetary policy committee (MPC) member Michael Saunders argued that a “modest” rise was needed to curb surging inflation and warned over the dangers of getting “behind the curve”.

Saunders – one of the MPC members who has recently voted to raise rates – said an increase would “help ensure a sustainable return of inflation to target over time”.

The Brexit-buffeted pound was highlighted as a key factor in attracting overseas buyers to British products. However, sterling’s slump has proved a double-edged sword for manufacturers, as it has also pushed up import and raw material costs.

Mike Thornton, head of manufacturing at business advisory firm RSM, said: “Manufacturers are clearly maximising the current economic situation and leveraging the weak pound, which has resulted in the expansion across all product categories, increased production levels, busy order books and an uplift in job creation.

“This continued growth, performance and optimism in the sector is great to see, but the key question is whether this is sustainable?

“Almost a third of businesses already reported an increase in purchase prices due to rising input costs. Combine this price inflation and increase overheads with a potential shortage of staff and raw materials following Brexit and the sector looks set for more challenging times ahead.”

Andy Hall, head of corporate banking, Barclays, central Scotland, added: “With Brexit negotiations now a reality, uncertainty around what any deal will look like will continue to hinder investment intentions but manufacturers have proved time after time that they are good at getting on with business.”

The report forms part of a series of PMIS which also cover construction and services.

sreid@scotsman.com