Manufacturers 'close to turning the corner'

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Recession-battered manufacturers could be "close to turning the corner" after a key survey today showed activity at its highest level for a year in May.

The Chartered Institute of Purchasing & Supply's (Cips) activity index posted a reading of 45.4 in May, still below the neutral mark of 50 but an improvement on the revised 43.1 seen in April.

It prompted Cips to predict that industry output would stem its decline and stabilise by the autumn. A score over 50 on the index would signal a return to growth.

Howard Archer, of IHS Global Insight said: "The further substantial moderation in the rate of decline in UK manufacturing activity in May is clearly good news and boosts hopes that the economy could start growing before the end of the year.

"Nevertheless, manufacturers still face serious handicaps and actual sustainable growth in the sector may yet be some way off."

The Cips survey reached a low point in February, but has recovered since then, helped by easing rates of contraction for output and new orders.

Production and new orders continued to decline in May, but at the slowest rates for 12 and 14 months respectively.

Vicky Redwood, of Capital Economics, said the survey suggested the improvement is down to more than an easing in the rate at which firms are running down their inventories.

"The balance is still consistent with annual falls in output of around 5 per cent, but this would be a big improvement on the double digit declines of late," she said.

"Overall, further evidence is pointing to a more modest drop in GDP in Q2 than in Q1 - but still a long way to go before a sustained recovery looks likely."

Large firms fared better than their smaller rivals, while consumer goods makers reported an increase in production for the first time in 14 months after a slight increase in new orders.

But jobs continued to be shed in the sector for the 14th month in a row as companies look to squeeze costs through workforce restructuring and redundancies.

Cips said while the rate of staff reductions remained rapid, it had slowed to its least severe since last October.

Roy Ayliffe, director at Cips, said: "UK manufacturing looks like it may be close to turning the corner as the May PMI posted its strongest reading in 12 months.

"At this rate we would hit the no-change 50.0 PMI benchmark by autumn - significantly earlier than economists initially predicted."

He noted that new export orders declined for the 14th successive month in May - and at a faster rate than in April - while domestic orders grew, suggesting the UK could be recovering faster than its overseas markets.

"However, despite these slight improvements in overall trading conditions, 'caution' is hot on the lips of UK manufacturers struggling to survive the onslaught of the recession," he said.