Manufacturing recovery slows, but prices soar

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Record growth in the manufacturing sector came to a halt last month, according to the latest survey of business sentiment, in the latest worrying sign that the UK economy is growing only slowly.

The Markit/Chartered Institute for Purchasing and Supply's index recorded a reading of 57.1 in March, a sharp decline on the 60.9 figure seen in February, though any number above 50 signifies some expansion.

The survey also revealed continuing strong inflationary pressures in the economy; firms said they raised their prices at the fastest rate since the CIPS started recording them in 1999. The rate of pass-through of higher import costs is faster than in the past, reflecting soaring world commodity prices, the sharp depreciation in sterling since 2008 and the recent rise in VAT and other duties.

Raw material such as oil, foodstuffs, cotton and timber are pushing prices higher at the wholesale end and will feed through to the shops in the coming months. Some Bank of England policymakers have said that inflation will reach 5 per cent soon, and this survey adds to the pressure on the Bank's Monetary Policy Committee to raise rates next Thursday. In March, three of the nine members supported a hike.

The manufacturing sector hasenjoyed remarkable growth in recent months, albeit from extreme lows, with a 1.1 per cent expansion in the fourth quarter of last year alone – an annualised growth rate of 4.4 per cent. It stands in stark contrast to the service sector, which has only marginally recovered from the snows in February. However, at around 12 per cent of national income now, manufacturing will find it more difficult to carry the economy out of recession than in the past, when export-led expansion in a much larger industrial segment of the economy helped secure recovery.

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."

The CIPS said that its new orders reading fell from 62.0 to 54.9, suggesting softness in domestic demand, a view that is supported by recent weakresults in the retail sector.