Manufacturing growth slips as prices rise

Manufacturing activity growth slowed to a five-month low in March and firms hiked prices at a record rate to cover soaring costs, a survey has shown.

Hopes that the UK's economy returned to strong growth in the first quarter of this year were dealt a blow after manufacturers said new orders dropped following a slowdown in consumer spending.

The Markit/CIPS Purchasing Managers' Index, where a reading of more than 50 indicates growth, fell to 57.1 in March from a downwardly revised 60.9 in February.

Manufacturers also said they were increasing their prices at the fastest rate since they were first recorded in 1999 as they passed on the rising cost of commodities such as oil, cotton and timber to their customers.

The manufacturing sector has enjoyed stellar growth in recent months and its latest performance will raise fears about the economy's ability to bounce back from the 0.5% slump in gross domestic product at the end of last year.

David Noble, chief executive of CIPS, said: "The mini-boom in UK manufacturing ran out of steam during March as faltering domestic consumer confidence, inflationary pressure and supply chain disruption combined to slow down expansion.

"Hopes that the UK economy might start to rebalance towards manufacturing seem to be withering on the vine."

Manufacturers put up their prices after their input costs went up for the 19th month in a row in March.

The increase will cause a headache for the Bank of England's Monetary Policy Committee as it wrestles to bring inflation under control.

The Consumer Prices Index (CPI) rose to 4.4% in February, which is more than twice the Bank's 2% target, and policymakers face the dilemma of whether to raise interest rates to counter inflation at the risk of harming the fragile economic recovery.

In yet more gloomy news on inflation, the Engineering Employers Federation said earlier this week that pay deals for the manufacturing sector increased by 0.2% to 2.4% in the three months to February compared with the end of 2010, as workers demanded greater pay rises to maintain their standard of living.

Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast, said the slump in activity growth was also worrying for the wider growth outlook.

She said: "Should manufacturing falter, prospects for UK growth would need to be revised significantly.

"Indeed, with domestic activity hit by rising inflation and fiscal retrenchment, GDP growth has been heavily reliant on the manufacturing sector, a reversal from the trend of the past 10-15 years."

But March marked the 20th month in a row of growth for the manufacturing sector and the rate of growth was still stronger than its historical average.

Export orders continued to grow, driven by demand from the US, Asia, the Middle East and Russia, although they were slightly down from February.

The sector also continued to generate jobs in March, with the increase in staffing levels only slightly down on last month's record peak. But Mr Noble warned future job creation could be jeopardised by the slowdown in growth.