16 October 2003 | Liam O'Brien
Manufacturing experienced a sharp upturn during September, according to the CIPS/NTC Research purchasing managers' index (PMI), but there are fears this upbeat picture hides deep-seated problems within the sector.
The manufacturing PMI rose from 52.2 in August to 52.9 in September, the sector's third consecutive month of growth and its sharpest rate of expansion for 17 months. New business was the principal driver, largely on the back of the weakness of the pound against the euro.
Manufacturing's buoyancy was matched in services and construction. Services moved to 58.7 from August's 57 and construction registered 56.9 from 56.3.
The PMI indicates that UK manufacturers' slim margins are not improving. It found output prices for UK manufactures rose by 0.4 per cent in the three months to September, while the cost of input materials rose by 2 per cent over the same period.
Experts point to this and other indicators to suggest manufacturing contraction.
The report comes in the same week figures from the National Institute of Economic and Social Research showed a 0.6 per cent fall in manufacturing output in August, the first since April.
The manufacturers' commodity buying consortium the Independent Manufacturers' Alliance (IMA), and the Engineering and Machinery Alliance (EMA), which is made up of 10 manufacturing trade associations, warned that slim margins were destroying the UK's manufacturing base.
Mike Legg, EMA secretary, said: "There are green shoots at the moment but these will die if the chancellor does nothing about the lack of investment in capital equipment. There are no margins at all to allow us to invest in modern equipment to keep up with the competition."
Shaun Green, commercial director of the IMA, added: "The problem is that margins are being screwed down all the time, and the lower the margins, the less the ability to invest."
Roy Ayliffe, CIPS director of professional practice, acknowledged that there was concern about how solid the manufacturing "recovery" was.
"The suppliers have said that they have had to cut prices to get business, but that means their margins are being squeezed. There could be a problem in a year to a year-and-a-half's time," he said.
One of the largest white goods manufacturers in Europe, Hotpoint, has warned that it was looking to source more components abroad because British suppliers were not flexible enough.
Marco Milani, the company's head of UK operations, said he was "astonished" that many of Hotpoint's 50 UK suppliers had not been interested in building new plants close to Hotpoint's four UK facilities.