Manufacturing continues to buck economic gloom

The manufacturing sector expanded at a record pace last month, offering some hope for the otherwise sluggish economy, but rising factory costs highlighted the threat posed by growing inflationary pressures, according to a new survey published yesterday.

The Markit/Cips manufacturing purchasing managers' index, a widely followed gauge of industrial activity, rose to 62 for January, up from an upwardly revised level of 58.7 for December. The January reading was the highest since the survey began in the early 1990s, and well above forecasts of 57.9.

The strength chimes with the recently released fourth-quarter GDP figures, which showed that while the economy as a whole contracted over the final three months of 2010, the manufacturing sector, which makes up around 13 per cent of the economy, expanded.

In addition to showing an overall increase in activity, the Markit/Cips survey pointed to strong growth in manufacturing employment and new orders.

Prices at Britain's factory gates were also higher, climbing at their fastest pace since the summer of 2008 and reinforcing the dilemma for the interest-rate-setting policymakers at the Bank of England, who must balance signs of inflationary pressures against the weakness in the wider economy.

"We've got a market acceleration in growth in the industrial sector and it does suggest that there is some significant underlying strength in the economy, although the services number is the one that really matters," Ross Walker, an economist at Royal Bank of Scotland, said. "It brings forward the risk of a rate rise sooner rather than later and brings February into play as a possibility. The only reason to think February is not a possibility is because of the GDP numbers."

Mr Walker's views were echoed by BNP Paribas economist Alan Clarke, who also said that intensifying pricing pressures were "likely to favour hiking rates sooner rather than later".

He added that the survey underscored the strength of the manufacturing sector, even though we are still awaiting the release of official industrial-production data.

"The hard industrial production data for December have not yet been released," he said. "In January 2010 – the last time there was widespread snow disruption – the Cips shrugged off the snow while the hard industrial-production data suffered a temporary fall.

"The key message from the survey today is that even if there is a drag from the snow in next week's industrial production data, once the weather effects have worked through, the underlying picture for manufacturing is incredibly robust."