British manufacturing celebrates a 'blistering' export-led recovery

british manufacturing appears to have put the worst of the recession well behind it and is enjoying a "blistering" revival.

The latest survey of confidence among purchasing and supply managers at the "sharp end" of British industry indicates a generally sustained upsurge in levels of confidence.

However, the crisis in the eurozone – Britain's largest export market by far – is casting a shadow over the export scene and otherwise encouraging news. Sentiment is improving at its fastest rate since the economy emerged from the previous recession in 1994 – which also saw a post-devaluation boost to activity after the ERM debacle in 1992.

The Chartered Institute for Purchasing and Supply (CIPS) said its Purchasing Managers' Index for May held steady at the 15-month high reading seen in April, at around 58 – any figure above 50 indicating future expansion. By comparison, the index hit a record low of 35.2 in February 2009.

The figure for new export orders fell back slightly, to 58 from just over 60, as the weakness of the euro and of demand in eurozone nations weighed on optimism. For now, though, the 25 per cent depreciation in sterling since its 2007 peaks is carrying the sector along.

With last week's upward revision in the GDP figures for the first quarter of this year, the momentum in the economy may be building towards a stronger recovery than hitherto assumed.

Even so, at around 12 per cent of the economy, manufacturing alone cannot drive a robust revival on its own. Yesterday's CBI survey of the service sector – comprising 70 per cent of the economy – is one of a number of much more mixed signals coming from the service sector, and the signs are that the Budget on June 22 will signal a substantial retrenchment in the public sector, following the £6bn in cuts already announced. Hundreds of thousands of jobs will go in the next few years.

Nor have the banks returned to normal patterns of lending to business. The CIPS also said that retailers, wholesalers and other suppliers were starting to rebuild the stocks that were savagely run down during the downturn.

Just as this "inventory effect" exaggerated the falls in the economy on the way down, so restocking now is giving a slightly overoptimistic picture of the true state of the economy. Moreover, it will be some years before manufacturing or the wider economy returns to its pre-crisis output.

Rob Dobson, senior economist at Markit, who conducted the survey for the CIPS, said: "UK manufacturing maintained its blistering start to the second quarter.

"This rapid growth is stretching capacity, leading to a survey-record increase in backlogs of uncompleted orders. The good news is that this encouraged employers to boost staffing levels again, and a strong rise in orders for plant and machinery suggests that companies are also boosting their investment spending."

But he warned: "Austerity measures announced in the UK may cool home demand, while export sales may be hit by the sovereign debt crisis in our largest trading partner, the eurozone.

"The ascent of survey indicators has been in no small part due to the sharp reduction in interest rates and the weakening in the pound. However, these effects are probably fading now."

For those who predict a "jobless recovery" the CIPS also had news: manufacturing employment rose for the second month running in May, with the rate of jobs growth only slightly below April's three-year high.

New export orders rose for the ninth successive month in May, with notably improved demand from China, Germany, the US, the Middle East and Africa. Companies reported that the sterling depreciation was still aiding sales efforts in a number of overseas markets. Part of the increase in new exports also apparently reflected successful new product launches.