Manufacturing industry remains in fragile state

Manufacturing industry staged a slight recovery last month but remained in a fragile state, according to a monthly survey of purchasing managers, writes Diane Coyle.

Yesterday's report of an end-of-year improvement posed no threat to the prospect of further base rate cuts, economists said - especially as the survey showed that the prices paid for materials had fallen for the second consecutive month. The purchasing managers' index rose above the key level of 50, the dividing line between expansion and decline, after dipping below it in November.

The survey of 290 firms by the Chartered Institute of Purchasing and Supply showed that output and employment rose, new orders fell less sharply and the stockpile of finished goods shrank.

Peter Thomson, director general of the Institute, said the downward trend in the economy since the middle of last year was worrying. ''This is rather sobering news for the start of 1996,'' he said. ''There are manufacturing companies that are more efficient than they have ever been, but they cannot put that efficiency to good use if they don't have the meat to grind.''

City economist Jonathan Loynes at HSBC Markets was also downbeat. ''There are no real signs of hope here for manufacturing,'' he said.

Mr Loynes said more base rate cuts would be needed this year. The next monetary meeting between the Chancellor of the Exchequer and the Governor of the Bank of England is due on 17 January. However, other economists took heart from the figures. ''The short-term prospects for manufacturing are not as dire as some would have us believe,'' said Geoff Dicks, chief UK economist at NatWest Markets.

The overall index climbed to 50.7 last month, up from a revised 49.9 in November. The output component rose for the second consecutive month to its highest level since last April.

Employment accelerated too, with companies recruiting to boost capacity. On the other hand, the level of new orders declined, although at a slower pace than in November.

Stocks of both inputs and finished goods fell in December. The report said the desire to reduce stock levels might explain the small deterioration in order books. Prices paid for materials fell significantly, pointing to lower inflation at the factory gate in the coming months. There was clear evidence that remaining supply bottlenecks eased. Deliveries of supplies were faster for the third consecutive month.