‘Confident but cautious’: economists respond to strong UK manufacturing survey

IHS Markit’s latest survey on the UK manufacturing sector made encouraging reading this morning, beating forecasts by a healthy margin and raising hopes that the sector will remain resilient after official data last week suggested economic growth in the UK is beginning to slow.

The good news helped the pound pick up slightly, reversing losses sustained in early European trading, though the reaction was relatively muted. Investors will be hoping for similarly encouraging signs from Thursday’s survey of the more important services sector, which showed more signs of a slowdown in the official GDP figures.

Here’s what economists are saying about the latest numbers:

IHS Markit’s Howard Archer said the results were impressive, but stressed that the manufacturing sector’s modest contribution to the country’s overall growth prospects:

This is a serious upward surprise – even allowing for the fact that it is the manufacturing sector that has recently been showing the most life in the UK economy, helped by a competitive pound and decent global growth.

However, it needs to be borne in mind that manufacturing output only accounts for 10.3 per cent of UK GDP.

Samuel Tombs at Pantheon Macroeconomics said the data supported other signs of strong recent growth, but warned that it will become increasingly difficult to sustain in the coming months:

The improvement in Markit’s survey brings it back in line with the CBI’s, which did not deteriorate in the first quarter. Sharp price rises, however, still threaten to choke off demand. The output prices balance edged up to 61.8 in April, from 61.7 in March, remaining in the top 10 per cent of all past readings since 2000. When the output prices balance has been this high in the past, growth in output usually has weakened over the following six months. In addition, other surveys suggest that manufacturers are investing less, despite the near-term strength of demand, due to uncertainty about post-Brexit trade ties. The recovery in the manufacturing sector, therefore, might quickly run into capacity constraints, ensuring that Britain doesn’t capitalise on the lower pound.

Mike Rigby, head of manufacturing at Barclays, echoed recent comments from the Bank of England about a temporary sterling-induced “sweet spot” for British exporters:

The UK economy as a whole may have made a sluggish start to the year but following a solid fist quarter, manufacturing continues to grow with healthy order books and encouraging levels of new investment and employment. Despite some easing, inflationary pressures will continue to take their toll on factory gate prices and ultimately manufacturers’ margins, however, the weakness in sterling and an improving global outlook continue to provide export opportunities for the sector. What we don’t want to see now is the prospect of fractious Brexit negotiations fostering a more cautious and uncertain approach to investment from the sector.

Dave Atkinson, UK head of manufacturing at Lloyds Bank Commercial Banking, said the PMI results support Lloyds’ view of a sector feeling “confident but cautious”:

While the pound remains weak and is undoubtedly pushing up import costs, we are seeing a spike in businesses seeking support to export and capitalise on overseas buyers’ appetite for goods priced in sterling. Welcome as this is, though, policymakers will be mindful that long-term export strength cannot be predicated on a weak currency alone.