• UK Manufacturing PMI posts 56.1 in December

• Improved domestic and overseas demand boosts output and new order growth

• Price pressures stay elevated but ease further from recent highs

The UK manufacturing sector ended 2016 on a positive note. Rates of growth for production and new orders in December were among the best seen over the past two-and-a-half years. Companies benefited from stronger inflows of new work from both domestic and overseas clients, the latter aided by the boost to competitiveness from the weak sterling exchange rate.

The seasonally adjusted Markit/CIPS Purchasing Managers’ Index® (PMI®) rose to a 30-month high of 56.1 in December, up from 53.6 in November and well above its long-run average (51.5). The headline PMI has signalled expansion in each of the past five months.

December saw output expanded to meet the needs of stronger new work inflows. Growth of production and new business was broad-based by sector, with strong gains registered across the consumer, intermediate and investment goods industries. However, the increases seen at consumer goods producers were relatively mild in comparison to those seen in the other sectors.

New export business rose for the seventh successive month in December. Furthermore, the rate of growth was the second-highest since early-2014, bettered only by that signalled in September 2016. Companies reported increased levels of new work from the USA, Europe, China, Middle East, India and other Asian markets.

Improved inflows of new business led to a slight increase in backlogs of work in December, the first rise since February 2014. This combination of higher output, new orders and work-in-hand encouraged manufacturers to expand capacity.

Employment rose for the fifth consecutive month in December, with the pace of jobs growth accelerating to the fastest in 14 months. SMEs saw the steepest expansion of staffing levels, although large-scale producers registered a modest increase too.

Price pressures remained elevated in December. Rates of inflation for input costs and output charges both remained among the fastest seen during the survey history, albeit both slowing from October’s highs.

The increase in purchase prices was the eighth in as many months. Companies linked this to the weak exchange rate driving up import costs. Among firms offering a reason for higher input prices, 75% made some reference to the exchange rate (compared to 90% in October and 84% in November). There was also mention of the rising cost of commodities like oil and steel.

Higher costs were passed on at the factory gate, as selling prices rose for the eighth straight month in December. Steep increases were seen across the consumer, intermediate and investment goods sectors.

 
David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply said: “The sector continued to strengthen this month, signalled by the headline index rising to a 30-month high. Manufacturers enjoyed the stronger economic environment and consequently raised production at a robust pace, while finding room to increase purchasing activity at the strongest rate for two and-a-half years.

"The stimulus for growth came from new order wins in both domestic and overseas markets. The rates of growth remained marked, while new export orders were boosted by the sustained weakness of the pound. Some respondents commented on an increase in orders from India, China, the US and EU.

"This growth in new order inflows was the strongest in two-and-a-half years. In response, employment levels gathered pace at the fastest rate for 14 months, where SMEs saw the biggest rises in staffing.
"This fervent activity placed suppliers under greater pressure. Supplier delivery times lengthened for the eighth month in a row, with manufacturers reporting raw material shortages as placing strains on vendor performance. Backlogs of work also increased for the first time since February 2014.

"The impact of rising input costs continued to be felt, as the rate of cost inflation stood at one of the highest in the survey’s 25-year history. However, this did not deter manufacturers from leveraging their buying capability and increasing their input orders - the fifth month in succession. In fact, the rate of stock building reached its fastest for six years, partly to counteract future expected price increases in raw materials and any possible shortages in the year ahead.

"This fizz in new orders signals good news for UK manufacturers which has previously been hit by uncertainties following the EU referendum, and the sector looks set to reach a more robust growth path at the start of 2017.”