Are positive manufacturing results a sign of a rebalancing UK economy?
- 2 February 2012
Markit's assessment was certainly positive: "Output expanded at the fastest pace since last March, new orders rose following a period of contraction and payroll numbers stabilised. Cost pressures continued to ease, as average input prices fell for the third straight month.
"Companies reported an increased willingness to spend among some UK clients and a further increase in new export orders. Higher output also led to a slight rise in stocks of finished goods, the first increase since April 2008."
Also, the data showed that UK manufacturers were picking up more business from the higher growth markets of Brazil, China, the Middle East and the US. Although this was marginal, it showed that the UK may yet be able to diversify away from the Eurozone and lessen the impact from its economic problems.
Even though any diversification away from the Eurozone is to be welcomed, the Eurozone manufacturing data also surprised markets with its relative strength: "Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 48.8 last month from December's 46.9, revised up from a flash reading of 48.7 but recording its sixth month below the 50 mark that divides growth from contraction." A stronger performance from Germany failed to offset weakness in the smaller Eurozone countries.
Nevertheless, a number of economists were willing to suggest that – in combination – the figures showed a recession in the UK might yet be avoided. David Tinsley, UK economist at BNP Paribas commented: "We believe that the UK will avoid recession and post some positive, if moderate, growth in the first quarter… It's clearly early days, but the outlook for the economy has distinctly improved over the last few months."
There was similarly buoyant news in construction: "The Markit purchasing managers index for the construction sector fell to 51.4 in January from 53.3 in December… However, the sub-index for business expectations surged from 57.6 to 66.2 amid optimism about improving economic conditions and new marketing initiatives.
"Sarah Bingham, an economist at Markit, said: "This suggests that growth may pick up again in the sector in coming moths and, on top of the surprisingly strong start to 2012 reported by the sister survey of manufacturing, will raise hopes that a slide back into recession may yet be avoided."
Certainly the figures show that declining inflation is already having a knock-on effect on global manufacturing as input costs fall. However, it is important not to overstate the impact of these figures. As the Guardian article points out, manufacturing makes up just 10.2% of the UK economy. Even a relatively strong pick-up is unlikely to make the difference for the UK economy. In practice, a report on the services sector – due out on Friday – is likely to be more telling for the overall UK outlook.
Equally, within Europe, the figures suggest that the region is still contracting, if only at a marginally slower pace than previously thought. As a whole, these figures dispel the prevalent view at the start of the year that the global economy was in a deep hole, unlikely to emerge but they do not suggest that risk has dissipated.
"What should be remembered, however, is that these expectations were still relatively low relative to historical averages, so these latest rallies will still be viewed by many as questionable at best (and also as new selling opportunities for equity markets)."
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