Manufacturing sector faces rough ride despite jump

Latest PMI snapshot reveals upturn in output but points to several headwinds

Britain’s manufacturing sector saw an unexpected upturn in its fortunes last month but the sector is suffering “underlying weaknesses” that could persist, it emerged yesterday.

The closely watched Markit/ Cips purchasing managers’ index (PMI) for UK manufacturing showed a reading of 54.4 for May, higher than the 53.9 recorded in April. Any reading above 50 denotes growth and economists had been expecting a figure of 53.5 for last month.

While the latest outcome represents a rebound from April’s 17-month low, the PMI reportnotedthattheimproved trend “masked several areas of potential concern”.

Growth last month was mainly achieved through the steepest build-up of finished goods inventories in the survey’s 26-year history and a sharp reduction in backlogs of work.

In addition, manufacturers reported the weakest increase in new orders since June 2017, which resulted in hiring intentions falling, especially within the consumer goods sector.

The survey also showed that input price inflation had gathered pace for the first time since the start of the year as higher oil prices took their toll.

To compound matters for the sector, US president Donald Trump’s trade war could dent the prospect of further growth this year.

Lee Hopley, chief economist at manufacturers’ organisation EEF, said: “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.

“But to complicate matters for monetary policy makers, price pressures have reemerged as commodity prices have picked up in recent months.”

Howard Archer, chief economic advisor at the EY Item Club think-tank, said the manufacturing sector was “not performing at anything like the level it achieved in the second half of 2017” and also warned that firms were facing a squeeze on margins.

He said: “The purchasing survey points to the sector struggling to regain traction in May after a clear loss of momentum over the early months of 2018. The PMI remains substantially below the 51-month high of 58.3 achieved in November 2017.

“The survey pointed to manufacturers’ input prices picking up for the first time since January and were well above long-term levels. This was attributed to higher raw material prices and shortages of supply for a number of inputs.

“Nevertheless, growth in manufacturers’ output prices moderated to be at the lowest level since August 2017. This pointed to an increased squeeze on margins.”

He added: “The best news in the survey saw output growth pick up in May to be at a five-month high. Worryingly though this was reported to be due to a sharp running down of backlogs of work and a record build-up of inventories of finished goods.”

sreid@scotsman.com