Manufacturing sector turns corner as factory orders finally rise


The manufacturing sector emerged from its longest decline since the financial crisis last month, buoyed by a rise in political certainty after the general election.

The purchasing managers’ index rose to the 50 mark — denoting no change —— from 47.5 in December and a “flash” reading for January of 49.8. Manufacturing makes up about 10 per cent of the economy and the index had been below 50 since May, the longest run since 2009.

The improvement was down to “mild recoveries in new orders and business confidence”, according to the survey by IHS Markit and the Chartered Institute of Procurement & Supply.

Rob Dobson, at IHS Markit, said: “A strengthened domestic market was the main source of new business. Overseas demand remained disappointing, however, as new export business fell for the third straight month in response to weak economic growth in key markets, notably European.”

Optimism rose to an eight-month high, with 47 per cent of manufacturers forecasting that output would expand in the year ahead, but it was low compared with historical standards.

Economists said that there was no indication of a large-scale return to spending as companies continued to face a challenging global environment. Part of this was because of the continuing uncertainty among some manufacturers about the impact of Brexit.

The prime minister has said that he is prepared to fall back on a so-called Australian-style trading arrangement with the European Union, seen by some as a version of no-deal, and would rather accept tariffs than EU law. The EU wants Britain to follow its rules on workers’ rights, the environment and subsidies in exchange for a Canada-style free trade deal. The tensions hit sterling, which fell by 1.95 cents, or 1.5 per cent, against the dollar to $1.3005 and by 1.4 cents, or 1.2 per cent, against the euro to €1.1757.

Howard Archer, chief economic adviser to the EY Item Club, said that a divergence from EU rules would raise costs, new rules and frictions at the border for manufacturers. The car, aerospace and food and drink sectors would be among those most affected. He said that past PMI surveys had overestimated the scale of upturns and downturns, particularly at times of political upheaval, “so the survey could possibly exaggerate the manufacturing pick-up in January after overplaying some of the earlier weakness”.

Samuel Tombs, at Pantheon Macroeconomics, said that the “threat of a trade shock” was likely to depress investment. “We remain downbeat about the prospects for the manufacturing sector beyond the next few months of recovery,” he said.

Last week the Bank of England cut its GDP forecasts, saying that Boris Johnson’s hopes for a Canada-style trade deal would knock 0.65 per cent off growth after three years relative to the deal Theresa May wanted. Mr Johnson’s pledge that a deal must be done by the end of the year was central to the judgment because it will introduce greater trade frictions next year.

The Bank cut its GDP forecasts from 1.2 per cent to 0.8 per cent in 2020, 1.8 per cent to 1.4 per cent in 2021 and from 2 per cent to 1.7 per cent in 2022.

Employment rose slightly in January after contracting over the previous nine months and inventories fell at the sharpest rate since May 2013.

IHS Markit published its first flash purchasing managers’ index covering Britain’s services and manufacturing sectors last November. It is published about a week before the final release each month and is based on about 85 per cent of replies from the 650 manufacturers and 650 services providers surveyed.

The flash survey is designed to provide an accurate indication of the final data. Markit said its analysis showed that the flash index varied on average by only 0.6 index points from the final readings. Although the PMI surveys are watched closely, they have been criticised as being too downbeat during last year’s political turmoil.

Markit also does flash PMI releases for the United States, the eurozone, Japan and Australia.