New orders drive fastest growth in factory activity for six years

Rolls Royce

Factories have made up some of the ground lost in lockdown, as demand for manufactured goods picked up domestically and abroad last month, but are still cutting jobs.

The purchasing managers’ index for manufacturing, a closely watched real-time measure of private sector activity, rose to 55.2 from July’s figure of 53.3. It was the fastest pace of growth since May 2014, where any reading above 50 indicates expansion.

The manufacturing PMI has been in positive territory for three months after the index’s fall to a historic low in April and further weakness in May, when much of the economy was shut down.

New orders rose at their fastest pace since November 2017 and while the bulk of the demand for new manufactured products was from the domestic market, “new export orders rose moderately for the first time in ten months”, the report from IHS Markit and the Chartered Institute of Procurement and Supply, which jointly compiled the survey, said. The improvements came from Europe, the Middle East, North America and Australia.

The positive outlook sets up Britain for a strong rebound in GDP in the third quarter, after record contraction in the second quarter of 20.2 per cent.

Separate manufacturing PMIs for the eurozone confirmed that the currency bloc is also enjoying sustained improvement.

Much of the recovery has been mechanical as the economy reopened. Factories are still operating well below their pre-pandemic capacity. “The main factors driving production and new orders higher have been the reopening of manufacturers and their clients following lockdowns and a loosening of other restrictions in place to combat Covid-19,” the report said.

According to the most up-to-date data from the Office for National Statistics, manufacturing output fell by 28.6 per cent at its lowest point and was 14.2 per cent down at the end of June. In a sign that the industry is still in trouble, companies shed jobs for a seventh successive month as employment fell at “one of the steepest rates during the past 11 years”.

While demand remains depressed, costs are rising and supply chains remain disrupted. “Input price inflation accelerated to a 20-month high in August. Rising costs were linked to reduced availability for certain inputs and supply-chain disruption,” the report said.

“Exchange rates and increased freight costs were also mentioned. Part of the increase was passed on to clients, with selling prices rising at the fastest pace since March.”

Rob Dobson, director at IHS Markit, said: “The downturn in employment may have further to run as the government’s furlough scheme is phased out, unless demand rises sharply. Given the fragility of demand, policymakers may struggle to prevent a ‘surge-then-slump’ scenario from developing.”

•American factory activity accelerated to its highest level since November 2018 in August, aided by a surge in new orders, but employment at factories continued to lag owing to safety restrictions that are intended to slow the spread of the coronavirus, a report from the Institute for Supply Management said.