PMI UK - Exchange rate drives up new export orders and input costs in October

CIPS 1 November 2016

A major feature of the latest survey was the effect of the depreciation of the sterling exchange rate.

Markit/CIPS UK Manufacturing PMI®

  • UK Manufacturing PMI at 54.3 in October
  • Upturns in output, new orders and employment continue
  • Weaker exchange rate raises input costs and new export orders
The UK manufacturing sector maintained a solid rate of expansion at the start of the final quarter. October saw the seasonally adjusted Markit/CIPS Purchasing Managers’ Index® (PMI® ) post 54.3, down slightly from 55.5 in September, to remain well above its long-run average of 51.5.
Underpinning the improvement in operating conditions were marked expansions of new business and production. New order volumes increased for the third consecutive month and at a pace close to September’s recent high. Companies reported higher demand from both domestic and export clients.
Although the slowdown in output growth was more noticeable in comparison, the rate of expansion in October nonetheless remained solid compared to series average.
The strongest performing sub-sector was intermediate goods, which saw production rise at the quickest pace in a year. Output also continued to increase sharply at consumer and investment goods producers, albeit at markedly slower rates than in September. A major feature of the latest survey was the effect of the depreciation of the sterling exchange rate.
Manufacturers reported that this aided efforts to increase inflows of new export business, resulting in new orders from the USA, the EU and China. There was also a marked cost impact, however, reflecting higher import prices and in the costs of products based on dollar-denominated commodities such as oil. Of the companies offering a reason for an increase in average purchasing costs, around 90% made some reference to the sterling exchange rate.
Purchase price inflation subsequently rose to a 69- month peak and to its fourth-highest level since the survey began in 1992. Companies also noted higher costs for energy, metals and pork products. Steep input price increases were registered across the consumer, intermediate and investment goods sectors, and at small, medium and large-scale producers alike. Inflationary pressure was also experienced at the factory gate, with average selling prices rising at the steepest pace since June 2011. This mainly reflected the pass-through of higher input costs to clients, aided by the recent firming of demand. Manufacturing employment increased for the third straight month during October. The rate of jobs growth accelerated to a one-year high. Companies linked higher employment to rising production requirements. Job creation was strongest at SMEs, while only a marginal increase was signalled for large-sized firms.
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply: “The sector held firm in positive territory as new orders, staffing levels and overall activity rose – though generally at a slower rate than the previous month. Growth continued to be driven by both domestic and particularly export markets buoyed by the weak pound and bringing orders from China, the US and the EU.
“SMEs showed the biggest appetite for employing more staff as the overall employment index showed a rise for the third consecutive month. Production and warehouse staff, plus apprentices fared the best for employment opportunities. “Backlogs of work eased slightly as the moderate easing in growth of new work released some capacity though purchasing managers reported an increase in average supplier delivery times.
“The impact of the pound’s performance against the euro and dollar was particularly felt on imports as manufacturers experienced one of the fastest rises in average costs for raw materials in the 25-year survey history. Especially highlighted were costs for flour, dairy products, steel and zinc. These price hikes resulted in manufacturers passing on higher prices to their customers as charges rose for the sixth consecutive month and to the steepest degree since June 2011. With rates of inflation moving higher, policymakers will need to keep a close watch and possibly change tack if needed to stay well within their targets.”
The November 2016 Report on Manufacturing will be published on: Thursday December 1st 2016 at 09:30 (UTC).

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