UK Manufacturing Activity Beats Analysts’ Expectations

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on Sep 5, 2012

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UK Manufacturing Activity Beats Analysts’ Expectations

While the August purchasing managers’ index (PMI) measuring the UK’s manufacturing activity showed that the sector was still shrinking, it nevertheless jumped to a four-month high, beating analysts’ expectations.

On 3 September 2012, The Times reported that the PMI, compiled by Markit Economics and the Chartered Institute of Purchasing and Supply (CIPS), rose to 49.5 in August, up from 45.2 in July and indicating that the rates of contraction had eased sharply for production, new orders and new exports. In addition, the PMI result surpassed the forecast of analysts, who’d been expecting a score of 46.

Despite the encouraging results, it remains that any result below 50 signifies contraction. “Having followed such marked declines in July, the August readings for production and new orders do little to change the underlying picture of a fragile sector facing enormous headwinds”, observed Rob Dobson, senior economist at Markit. And while referring to the slowdown in the pace of decline as “heartening”, Dobson also noted that overall demand was too lacklustre to provide an imminent and sustained recovery.

!m[](/uploads/story/330/thumbs/pic1_inline.png)But still, the slower pace of contraction in the UK’s manufacturing sector is a positive development, especially given the weak score observed in July. According to a Financial Times piece, more manufacturers than in the previous month were reporting improvements in most areas of business activity, to levels indicating that the sector at worst marked time over the summer. Indeed, more manufacturers reported an increase in the size of their workforces in August than reported a cut, suggesting a continued strong performance in the labour market. The FT quoted Mark Lee, head of manufacturing at Barclays (LON:BARC), who noted that the figures gave a boost to sentiment after a challenging summer. “However, the Eurozone crisis continues to cast a shadow over the industry, and until our key European export destinations stabilise, UK manufacturers will find growth hard to come by”, Lee pointed out.

The Eurozone manufacturing results were less positive than those observed in the UK, with The Times reporting that activity as measured by Markit fell to 45.1 in August, worse than the estimated 45.3. And while the rate of contraction eased in Germany, France, Spain, the Netherlands and Greece, downturns accelerated in Italy and Austria. At 50.9, Ireland was the only Eurozone country where a figure above 50 was recorded.

In the survey period, Eurozone manufacturers suffered from fewer orders for new work from domestic markets, along with falling levels of intra-zone trades and weaker global economic growth. In August, the level of incoming export orders fell for the fourteenth consecutive month with the steepest contraction rate since November 2011. The discouraging Eurozone manufacturing results are dampening hopes for an export-driven recovery for the UK economy. The Times quoted Lee Hopley, chief economist at the EEF manufacturers’ group, as observing: “The outlook for export-focused manufacturers, and hopes of an export-led economic recovery, continue to look pretty challenging.”
The Times also wrote that outside Europe, the PMI compiled by HSBC bank (NYSE:HBC) and measuring Chinese manufacturing activity registered a decline from 49.3 in July to 47.6 in August, prompting analysts to warn that the country might miss the GDP targets set by the Premier Wen Jiabao. The only positive result seems to be coming from the United States, with Bloomberg reporting that Markit’s final index of US manufacturing was little changed, slightly rising from 51.4 in July to 51.5 in August and anyway staying above the watershed point of 50.