UK manufacturing growth hits highest level since June 2014

Purchasing Managers Index shows increased orders from home and abroad but cost pressures have also risen

Manufacturers reported increased orders in December despite warnings of gathering clouds on the horizon (Reuters)

UK manufacturing is growing at its strongest rate in two-and-a-half-years, a new survey showed on Tuesday.

The UK Manufacturing Purchasing Managers Index hit 56.1 in December, up from 53.4 in November and far ahead of analysts expectations of 53.3 and the survey’s long-run average of 51.5. The number is consistent with an increase in output of 1.5 per cent in the quarter.

New orders from both home and abroad fuelled the expansion, said Markit who carried out the survey. However, the report sounded a note of caution as cost pressures on factories also increased, as a weakened pound raised import prices while fuel costs have also risen. This is expected to result in higher prices for shoppers in 2017.

Britain’s economy has so far performed better than many economists predicted in the wake of June’s Brexit vote. Consumer spending has remained buoyant, partly fuelled by record credit card debt.

“The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround, while the domestic market has remained a strong contributor to new business wins,” said Rob Dobson, senior economist at IHS Markit.

“Of the companies citing a cause of higher costs, 75 per cent linked the increase to the exchange rate,” Dobson said.

The pound is down around 10 per cent against a basket of other currencies. Samuel Tombs, chief UK economist at Pantheon macroeconomics said domestic demand will fall this year as incomes are squeezed.

“The boost to growth from sterling’s depreciation will remain relatively modest, because exporters have raised sterling prices sharply and because uncertainty about the UK’s future trade relationships will deter exporters from investing,” he added.

“Accordingly, the manufacturing sector most likely will struggle to maintain its current growth momentum throughout 2017.”