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03 Jun 2014

Good news for British manufacturing

Manufacturing activity in Britain increased for the 15th straight month in May, in further signs that the recovery is broadening out.
Growth was underpinned by strong domestic and overseas demand, according to survey compiler Markit. It said the broad-based expansion reflected "stronger economic conditions", as small, medium and large enterprises all hired more staff.

Rob Dobson, senior economist at Markit, said a "sharp re-acceleration" in demand for goods such as plant and machinery suggested that business investment was growing strongly.

“The upturn remains broad-based by sector and is being enjoyed by SMEs and large-scale producers alike," he said. "A strong domestic market is meanwhile being supplemented by one of the best growth phases for new export orders in the survey history. The benefits of the manufacturing upswing are also being shared with the wider economy through solid job creation."

While the Markit/CIPS manufacturing Purchasing Managers' Index (PMI) eased to 57 in May from 57.3 in April, activity remained well above the 50 level that divides growth from contraction and was in line with market expectations. Markit described May's expansion as "one of the highest readings in the survey's history".

Analysts said the recent strong run of growth in the sector could trigger a buying spree for companies wishing to expand. "As we move further into 2014 and levels of optimism begin to grow, we could start to see increased activity in the M&A space as manufacturers look to further drive cost efficiencies and find more ways to expand into growth markets,” said Mike Rigby, head of manufacturing at Barclays.

Mark Carney, the Governor of the Bank of England, has said the recent strong run of growth in Britain will be unsustainable without stronger business investment and export growth. Increased demand for plant and machinery is likely to have been spurred by a doubling of the annual investment allowance in the Budget to £500,000. However, Markit said it was still too early to begin raising interest rates.

“As manufacturing only makes up a small share of the UK economy, around 10pc, these positive data are unlikely to shift the Bank of England’s MPC on to the path of normalising monetary policy on their own," said Mr Dobson. "The first piece of that puzzle nonetheless seems to be in place and, if accompanied by further surging growth elsewhere in the economy, the clearer picture unfolding could raise the stakes for an earlier than expected step in that direction."