Engineering news
Manufacturing has had a strong start in 2017, but UK firms have also reported the steepest rise in factory input costs on record, according to the Markit/CIPS Purchasing Managers’ Index (PMI).
The PMI posted 55.9 in January, only slightly below December’s two-and-a-half year high of 56.1. The headline PMI has remained above the neutral mark of 50.0 for six straight months. However, average purchase prices rose at the steepest rate in the quarter-century history of the survey, driven up by the weak sterling exchange rate and higher costs for commodities such as oil, plastics and steel.
Meanwhile, improved pricing power and efforts to pass on part of the increase in costs led to a further sharp rise in average selling prices. Output charges rose to one of the greatest extents in the series history. Supplier price hikes also played a role in raising average purchasing costs in January. Companies indicated that higher demand for raw materials was testing the capacity at vendors and leading to shortages of certain inputs.
Despite fast rising costs output rose at the fastest rate since May 2014, as new order intakes expanded at “a robust pace”.
The latest expansion of manufacturing production was underpinned by a solid increase in new order intakes. The rate of growth in new business moderated following the prior month’s high, but remained well above the long-run survey average.
The domestic market was said to be the prime source of new business wins in January. There was also a modest increase in new export orders, although the pace of expansion was noticeably slower than during the prior survey month.
Where an increase in new work from overseas was reported, this was linked to improving global market conditions and the weak sterling exchange rate. By sector, the strongest growth of output and new orders was registered by intermediate goods producers. The investment and consumer goods sectors also registered further solid expansions of production and new business.
Manufacturing employment rose for the sixth successive month in January, albeit to a lesser extent than one month earlier. The faster pace of job creation was signalled at SMEs, whereas the increase at large-sized producers was only mild. The January report sees the official launch of a new index tracking business optimism – the Future Output Index – based on a question asking companies if they expect production to be higher, the same or lower in one year’s time. Confidence rose to an eight-month high in January. Almost 51% of respondents expect output to rise over the next 12 months, reflecting new market opportunities and planned product launches.
Rob Dobson, senior economist at IHS Markit, which compiles the survey, said: “Over 55% of companies link rising costs to the exchange rate. However, we’re also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel. With cost pressures increasingly feeding though to higher selling prices at factories, it looks inevitable that consumer price inflation will rise further in coming months.
“The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth going forward. Companies seem fairly sanguine on this front, as a new index tracking business confidence signals optimism climbed to an eight-month high.”
Lee Hopley, chief economist at EEF, the manufacturers’ organisation warned of the return of inflation in 2017. Hopley said: “With mounting evidence of pricing pressures across the industrial sector, the pass through to consumers is certainly on its way. This does present some risks to the resilience of the UK market later this year, in addition to the risks from further sharp swings in exchange rates and a shift in gears in global growth.”
Dave Atkinson, head of manufacturing at Lloyds Bank Commercial Bank, added: “There will be challenges ahead as import prices continue to rise, affecting bottom line profitability, while the impact of some companies’ historical long-term currency hedging coming to an end may expose them to the devaluation of sterling that they have managed against to date.”