Domestic demand fuels manufacturing growth at start of Q4

The UK manufacturing sector made a bright start to the final quarter of 2014, with rates of expansion in production and new business accelerating sharply from their September lows, according to the latest report from Markit.

The pick up in growth mainly reflected the resilience of the domestic market, as overseas demand was impacted by the ongoing economic weakness of the eurozone and the euro-sterling exchange rate.

“The latest report is a positive marker for the start of the final quarter, as the growth rate of the UK manufacturing sector staged a mini-recovery in October. The headline PMI hit a three-month high, improving on September’s low,” explained Rob Dobson, Senior Economist at Markit.

Manufacturing production rose for the nineteenth successive month in October. Although the rate of expansion remained below the average for the year-so-far, it nonetheless recovered from September’s low to reach a three-month high. The latest scaling up of output was underpinned by improved inflows of new work and efforts to clear outstanding business.

Strong increases in production were signalled for the consumer and intermediate goods sectors, while capital goods manufacturers also saw a solid gain in output volumes.

“Although the pace of expansion remains below that seen at the start of the year, suggesting the sector will remain only a modest contributor to broader economic growth, it is positive to see the sector break its recent sequence of slower growth,” Dobson continued.

Growth of incoming new business also accelerated to a three-month high in October, led by solid gains in new work from domestic-based clients. In contrast, new export orders fell for the second straight month.

The latest decline in foreign demand for UK manufactures was centered on the Eurozone, reflecting the subdued economic performance of that region and further stymied by the exchange rate. Slower growth in other key markets, such as the US and China, were also mentioned by some companies.

“Another positive is the continued resilience of the domestic market, which was the main source of new contract wins,” Dobson added. “However, this was partly offset by a further drop in new business from overseas, as exporters were hit by a near-stagnant Eurozone economy and a relatively strong euro-sterling exchange rate. Reports from companies mentioning slower inflows of new business from markets such as the US and China also paint a less than rosy picture for exports moving forward.”

Manufacturing employment rose further during October. Staffing numbers rose sharply at SMEs, but were held steady at larger-scale producers. Price pressures remained relatively subdued during the latest survey month. Input costs fell for the second month running, mainly reflecting reductions in commodity and oil prices.

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply, said: “Supply chain managers reported production levels rising for the nineteenth month buoyed up by falling input costs. A drop in commodity and oil prices especially has given the sector an advantage in tackling any outstanding orders and improving the pace and delivery of any new work. This in turn contributed to lower output price inflation, which was further influenced by competitive pressures. “