Activity in the UK’s manufacturing sector slipped from a three-year high in May according to a closely-watched survey, but still remains in “rude health”.
The purchasing managers index for manufacturing, which is considered one of the best indicators of growth in the sector, showed a balance of 56.7, down from 57.3 in April which had been the highest reading since 2013, but still ahead of analysts’ forecasts.
Any balance above 50 signals growth, while below signals contraction. The manufacturing sector has remained above 50 since August last year.
The strength of the domestic market remains the biggest driver of growth in manufacturing, the survey said, with growth in new orders remaining solid, backlogs of work rising at the quickest pace in six years and business optimism reaching a 20-month high.
Lee Hopley, chief economist at the EEF, the manufacturers’ organisation, said: “Output and orders expansion is being driven by resilient demand coming through UK supply chains and a better looking global economy than UK manufacturers have been used to for some time.”
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Such underlying strength is proving to be a boost for jobs in the manufacturing sector, with the fastest rise in new jobs being added to employers’ payroll since mid-2014.
However, the support from the fall in the pound proved to be less of a benefit for growth in exports than hoped last month.
Rob Dobson, a senior economist at IHS Markit, which compiles the PMI survey, said: “Growth of new export business played a lesser role in comparison [to the domestic market], with the trend in foreign demand continuing to improve only in fits and starts, despite the assistance of a historically weak sterling exchange rate.”
Cost pressures for manufacturers due to the depreciation of sterling still remained high, but there was a fall in the price of raw materials while the price of goods sold by manufacturers eased to a five-month low, suggesting that the peak of sterling’s pass-through to manufacturing costs and prices has now passed.
Martin Beck, senior economic advisor to the EY Item Club, said that the PMI reading for May “was well above the long-run average and was indicative of a manufacturing sector which, at least as far as the business surveys are concerned, is in rude health”.
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Economists said that the strong PMI surveys for the past two months suggest that the manufacturing sector has picked up speed again after a sluggish start to the year and is likely to show growth of around 2 per cent for the second quarter, which would give a boost to the economy’s overall GDP growth.
Scott Bowman, an economist at Capital Economics, said: “After the sharp slowdown in GDP growth in the first quarter, this survey suggests that manufacturing will help growth to accelerate in the second quarter. And the sector should play a bigger role in offsetting the slowdown in the consumer services sector further ahead, which will be caused by the continued rise in inflation.”
Manufacturing output expanded by 0.5 per cent in the first quarter of this year, according to official figures, outperforming the UK’s dominant services sector, which slowed to growth of just 0.3 per cent.
However, the manufacturing sector only makes up 10 per cent of the economy, compared to 79 per cent for services.