UK factory growth surprises with January PMI boost

Factory output in the UK recorded a healthy – and surprising – increase in January despite the continuing sluggishness of the global economy.

Rolls Royce aircraft engine factory

While exporters struggled because of the relative strength of the pound and global conditions, domestic demand boosted the Markit/CIPS Purchasing Manager's Index (PMI) for manufacturing to a three-month high, confounding analysts' expectations of a slowdown in growth.

The reading for January stood at 52.9, up from 52.1 in December in an index where any reading above 50 indicates growth.

"The UK manufacturing sector registered an uptick in its rate of expansion at the start of 2016, shrugging off a number of potential headwinds, ranging from global financial market volatility to localised flooding in the north of the country," said Rob Dobson, senior economist at Markit.

"The domestic market remains the key growth driver. In contrast, the trend in new export orders continues to disappoint, falling back into reverse gear in January. Even after recent easing in the exchange rate, a number of manufacturers are still finding that the strength of the pound against the euro is impacting order inflows."

The PMI, based on a survey of more than 600 companies, found that large manufacturers had fared particularly well during the month while SMEs reported only "mild" growth.

The Guardian reported, "The survey of some 600 companies paints a more upbeat picture than official data for last year, which showed manufacturing output stagnated in the final quarter of 2015 leaving Britain's service sector to drive overall economic growth.

"But behind the main index on the PMI report, there were signs that volatility on financial markets and worries about the global economic outlook were hurting UK manufacturers. The UK report followed a manufacturing survey from China signalling its factory sector shrank again in January.

"Reflecting headwinds from China and other emerging markets, January's rise in UK manufacturing production was driven by a rise in domestic orders, the PMI survey compilers said. Export orders had declined, however, as companies cited stronger competition and tough market conditions."

Lee Hopley, chief economist at the manufacturers' organisation EEF, said the PMI indicated that 2016 had made an encouraging start, but she warned that there could be difficult times ahead.

"Looking beyond the headline there's conflicting signals, with growth drivers narrower in terms of sub-sector and size, and manufacturing posting job losses for the fourth time in the last six months," she said.

"The question now is whether manufacturing will regain much-needed momentum in 2016 or whether today's figure will prove a false signal. The sector is likely to remain under pressure in the coming months from the ongoing weakness of the oil price weighing on manufacturers embedded in the oil and gas supply chain, along with weak demand from emerging markets."

Publication of the PMI coincided with news that Rolls-Royce had won a $2.7 billion order to build and service Trent 1000 engines to power 19 Boeing 787 Dreamliner aircraft ordered by the airline, Norwegian.

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