Domestic orders and overseas demand boost UK manufacturing

UK manufacturing activity expanded again in September as new domestic orders and increasing demand from overseas helped the sector achieve its strongest quarter of growth this year.

The Markit/CIPS survey of manufacturing purchasing managers rose to a 27-month high of 55.4 in September, up from 53.4 in August and following a sharp fall to 48.3 in July. This is the highest level the index has reached since June 2014. Any result above 50 signals an expansion in activity.

The strong performance took many by surprise but it should not have done, according to Alan Clarke of Scotiabank: “Financial conditions are very accommodative thanks to the weak GBP exchange rate, low bond yields and buoyant equities. Business sentiment tends to do well in that environment and hopefully also growth.”

The sector, which makes up around a tenth of the UK economy, experienced a broad-based expansion in activity last month, according to the figures published on Monday. Demand for consumer goods drove an increase in new domestic orders, while the weakness of sterling appears to have boosted orders from overseas.

The consensus forecast had been a fall in the index to 52.1. September’s strong PMI result, combined with figures published on Friday, which showed services output expanded faster than expected in July, suggest the economy could grow more rapidly in the third quarter than economists had been expecting.

“While we previously expected the economy to broadly stagnate and some others expected a contraction in output in Q3, we now think that GDP will expand moderately,” said Scott Bowman of Capital Economics.

James Knightley of ING said the latest figure “casts serious doubt on the prospect of additional Bank of England policy easing at the November [Monetary Policy Committee] meeting”.

The PMI figures are consistent with manufacturing output growing by 0.5 per cent in the third quarter. This would be significantly slower than the second quarter, when output grew by 1.6 per cent. But it would nonetheless be a strong outcome given widely held concerns earlier in the year that uncertainty about the UK’s future outside the EU would depress economic activity.

Markets reacted positively to the new figures. Sterling recovered some of the losses experienced earlier in the day, which followed Theresa May’s announcement over the weekend that she would invoke Article 50 no later than next March. This would start a two-year countdown to Britain’s exit from the EU.

While the PMI provides a useful early indicator of the strength of economic activity, it suffers from some weaknesses. On Friday the Office for National Statistics will publish hard data on manufacturing output in August. This will show whether output in the sector expanded in the way signalled by the PMIs.