Manufacturing keeps up record rate of growth

Britain's manufacturers maintained record growth rates last month as demand strengthened at home and abroad and more companies said they planned to hire new staff.

The monthly purchasing managers' index from Markit and the Chartered Institute of Purchasing and Supply (Cips) held steady at 61.5 points – its highest level since the survey began in 1992 – where any figure above 50 indicates an expansion in demand.

Output and new orders were only slightly below the record levels reported in January, while the employment index shot up to 61.6 – more than 10 points higher than six months ago.

The continuing robust recovery, and particularly the good news about jobs, will be welcomed by the Chancellor, George Osborne. Not helped by fourth-quarter GDP figures showing a shock 0.6 per cent contraction, the Government faces growing calls for a coherent strategy to ensure that private sector growth makes up for the hit caused by spending cuts in the public sector.

But even with record growth, manufacturing alone cannot deliver economic recovery. Rob Dobson, a senior economist at Markit, said: "The strong performance of the manufacturing sector, which makes up 13 per cent of UK GDP, can only partly offset the weaker parts of the economy such as services and construction."

Industry is also wrestling with soaring inflation. The figure of 83.7 recorded in last month's Cips input costs index was only a fraction of a point lower than January's 16-year high. And economists are predicting worse to come, adding to pressure on the Bank of England to raise interest rates despite the ambiguous outlook for the economy as a whole.

"Strong growth in demand across the manufacturing sector continued to put breath in the sails of the UK economy in February," said the Cips chief executive, David Noble. "The fly in the ointment remains macro-level inflation, which is likely to go from bad to worse due to the unrest in Libya and escalating oil prices."

Manufacturers across Europe are recording similarly strong performances. A eurozone version of the manufacturers' PMI from Markit/Cips, also published yesterday, showed the index at a record 59 points, indicating the fastest growth since 2000, and growth in every country except Greece.

In part, British industry is rising on the same wave. "With the German manufacturing juggernaut going from strength to strength, the many UK manufacturers that feed into northern European industrial supply chains are benefiting hugely," said Graeme Allinson, the head of manufacturing at Barclays Corporate. "This growth is one of the key reasons why manufacturing continues to outperform the general UK economy and why sentiment in the sector remains so high."

But inflation is not the only concern facing the sector. There are also questions about whether manufacturers can maintain their current momentum over the year ahead, not least in the context of stability concerns in peripheral EU markets such as Ireland and Portugal.

"Will manufacturers be able to sustain this performance as stock rebuilding draws to a close and tighter fiscal policy weighs down on domestic demand?" asked Howard Archer, the chief economist at IHS Global Insight.

"While global economic activity currently looks decent, there is the risk that problems in the eurozone could threaten foreign orders."