Manufacturer’s roller-coaster year looks to have settled down…for now at least.
Today the UK manufacturing PMI printed at 53.4. Despite this being a fall from October's reading of 54.2, it is still well above the 50 no change mark and 1.9 points above its long term average.
This is a striking recovery compared to just 4 months ago, in which in the immediate aftermath of the Brexit vote, the indicator tanked to a 3 year low of 48.3. Manufacturer’s confidence was shot, sterling dived and uncertainty reigned supreme. Doom and gloom indeed.
So what’s the cause for the recovery?
Since then, the economy and in particular the manufacturing sector has performed much better than anticipated, illustrated through the indicator stabilising at relatively high levels for the last 4 months. Brightening demand conditions, both domestically and throughout key international markets provided the initial pick up, as well as the realisation that the economic environment wasn’t going to change for some time to come.
The depreciation of sterling has also come into play, helping to boost exports, particularly in more commoditised sectors where the effects will have filtered through relatively quickly. This is evident though rising orders from the US, Middle East and particularly Europe where the Eurozone manufacturing PMI hit a 34 month high of 53.7 in November.
This trend is set to continue with the full force of the depreciation set to be felt in 2017 when the effects filter through into more high value sectors.
All of which has led to a much more promising outlook compared to 4 months ago. GDP came in at a positive 0.5% for quarter three and the OBR revised up its forecasts for 2016 as a whole to 2.1%. There was also promising news from the Chancellors Autumn statement in which additional spending plans in digital infrastructure and R&D were revealed. These should both help to support the manufacturing industry through the coming 4th industrial revolution.
So this is all good news right? Time to put our feet up, enjoy the festive period and put this whole Brexit saga to bed?
Unfortunately not. By all means please indulge in copious amounts of mulled wine and mince pies over the coming weeks, but be warned 2017 will bring a reality check for many.
Inflation to rear its ugly head...
The inevitable rise in inflation will come and with it downward pressures on household consumption which thus far has been resilient. Manufacturers have already seen rising input prices squeezing their margins, with November's input prices only dipping slightly from the 69 month high recorded in October.
Factory gate prices (output prices) for goods produced by UK manufacturers have consequentially risen 2.1% in the year to October, and it is only a matter of time before this is passed on to the consumer. The intensifying cost pressures will be of great concern to manufacturers after the New Year.
But don’t let this get you down. The manufacturing sector is in much better shape to deal with these upcoming challenges, and the overall performance of the industry in the last 4 months has been promising. Ohh and it’s almost Christmas.