British factories bounced back to life last month on surging domestic and overseas orders, raising hopes of an economic pick-up and sparking speculation of an early interest rate rise.
The manufacturing purchasing managers’ index for last month recorded its strongest reading since June last year, taking markets by surprise and sending the pound higher in early trading against the euro and the dollar.
Manufacturing has dropped back into recession this year, its third in a decade, and dragged the recovery backwards, so signs of a marked improvement were welcome. Ruth Miller, UK economist at Capital Economics, said: “The survey offers some hope that the manufacturing sector may now have passed the worst.”
Markit, the compiler of the index, claimed that “the survey is consistent with a quarterly rate of growth of around 1 per cent”, although there are still two more months of the quarter to measure. Growth in the three months to September was a disappointing 0.5 per cent.
The PMI provided evidence of a broader improvement in the manufacturing sector, as the new-orders sub-index recovered to its highest level since early last year. Within that, export orders grew strongly, with work coming from the Middle East, East Asia and the United States in particular. Employment intentions also increased.
“This is very impressive given the strength of sterling and external growth worries,” James Knightley, an ING Financial Markets economist, said.
The headline activity index jumped from 51.8 in September to 55.5, the highest reading since June last year, with any figure above 50 indicating growth. The result was also far better than even the most optimistic forecast of 52.5 in a Reuters poll and above the 51.3 consensus.
Signs of life in both manufacturing and exports may help to boost flagging confidence and provide a counterpoint to concerns about the global economy.
With the Bank of England announcing its rate decision on Thursday, the positive news may reinforce the case for a rate increase. Signs of moderate growth in manufacturing in the eurozone, where the PMI reading rose from 52 to 52.3, could also provide some reassurance.
Elizabeth Martins, UK economist at HSBC, said: “The strong PMI could tip the balance for any potential hawks this month, particularly if the services PMI on November 4 is also strong.”
A separate survey from the British Chambers of Commerce and DHL, the delivery company, was less upbeat. The quarterly international trade outlook indicated that exports sales and orders had fallen to their lowest level in more than six years, which has knocked confidence.
John Longworth, director-general of the BCC, said: “Driving export growth is key to reducing the UK’s deficit and maintaining our global competitiveness. These figures make it clear that the UK’s export drive is at risk of going into reverse gear, precisely at the time when it needs to be moving forward.”
The contrasting results may reflect the different experiences of big and small companies. The PMIs warned that “growth is being driven by a narrow section of the manufacturing industry, as strong and surging growth at large-sized companies contrasted sharply with the more subdued expansion at SMEs”.
The BCC/DHL survey was more reflective of the attitudes of smaller companies and echoed research by the CBI that found that confidence among smaller exporters was down.
– Consumer confidence has risen for a seventh consecutive quarter to its highest level on record, according to Nielsen, the information group. With wages rising and inflation at rock bottom, households were more positive about their finances than they have been in the past nine years. The proportion of respondents who believe that the UK is in recession was its second lowest since the question was first asked as part of the survey seven years ago.