Manufacturing activity hits 30 month high in December

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Manufacturing activity ended 2016 on a strong footing, with the PMI indicator hitting a 30 month high in December of 56.1. This is well above the long term average of 51.5 and represents the fifth successive month of expansion since the post Brexit collapse.

 

Activity levels on the up

Resilient domestic demand, as well as brightening demand conditions from key export markets has driven the surge in output and orders.

The latter, illustrated for instance through the Eurozone PMI printing at 54.9 in December, its highest level since April 2011, has been supported by the sharp and sustained depreciation of sterling and with it the boost to export competitiveness.

Effects of weaker pound filtering through

In the months that followed Brexit and the subsequent dive in the pound, the effects of the sterling depreciation on manufacturing exports had been limited. But as expected these effects are now filtering though into not only commoditised sectors but high value sectors, bringing with it a boost to activity levels.

This is illustrated through companies reporting increased levels of new work not only from Europe, but the US, China and the Middle East.

Encouragingly this trend is likely to continue into 2017 as clients expect the weak pound to prevail, allowing the beneficial effects to continue to filter through and with it a boost to output and orders. This should hopefully encourage manufacturers to further expand capacity.

December-PMI 

Price pressures building…

As we know though, the flipside of Sterling’s depreciation is the rise in input prices and the pressure this puts on output prices and/or profit margins.

Input prices remained elevated in December, albeit slowing from Octobers 69 month high. It is only a matter of time before these rising input prices are passed onto the consumer and with it the negative effects on consumer’s purchasing power. This will be of great concern to manufacturers heading into 2017.

But let’s enjoy the good news while we can! December’s activity levels are at their highest level for 30 months, putting manufacturing in a healthy position going into 2017. Something to cheer you up on your first week back at work…

Author

Economist

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