Surge in costs weighs down manufacturing output

Output in Britain's manufacturing sector slipped in September amid a surge in costs linked to higher

Output in Britain's manufacturing sector slipped in September amid a surge in costs linked to higher commodity prices and the weak pound. Picture:: David Davies/PA Wire - Credit: PA

Output in Britain's manufacturing sector slipped in September amid a surge in costs linked to higher commodity prices and the weak pound.

The Markit/CIPS UK Manufacturing purchasing managers' index (PMI) showed a reading of 55.9 last month, down from 56.7 in August and coming in below economist expectations of 56.2.

A reading above 50 indicates growth.

Rising costs were primarily to blame for the slide in output, which just a month earlier was sitting at four-month highs.

IHS Markit director Rob Dobson said rising cost pressures are likely to impact company profit and could disrupt production in the short term.

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He said that the sector is 'increasingly being buffeted by rising cost inflationary pressures, as rising commodity prices and higher import costs from the historically weak sterling exchange rate are being exacerbated by supply-chain capacity constraints and input shortages.'

'This will likely exert further upward pressure on prices, dent profitability and potentially disrupt production schedules in coming months,' he added.

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However, September's reading still marked the 14th straight month of rising production, thanks in part to new business, with companies reporting 'solid' demand from both domestic and overseas markets.

The weak pound was cited by some firms for helping to boost exports, though its impact has diminished compared to earlier this year.

Mr Dobson said: 'Although it looks as if the sector made solid progress through the third quarter as a whole, the growth slowdown in September is a further sign that momentum is being lost across the broader UK economy.

'Exports remain a bright spot, however, still rising at one of the strongest rates over the past six-and-a-half years.'

Optimism is still relatively strong, with more than 51% of firms expecting production to rise over the coming year, reflecting international expansion efforts, efficiency drives and fresh investment plans.

Job creation slowed from August's three-year high, but was described as 'broadbased' spanning across the consumer, intermediate and investment goods industries.

The pound was already trading in the red ahead of the release, but edged lower to trade down 0.6% versus the greenback at 1.331.

Sterling was nearly flat versus the euro at 1.133.

Mike Rigby, head of manufacturing at Barclays, said it was 'frustrating' to see Britain's manufacturing sector stuck in a period of low growth despite the fast pace of technological innovations.

He said: 'The benefits of a weak sterling and an improving global economy may not amount to much for the sector unless it invests more to improve efficiency and ramp up capacity.

'With cost pressures remaining elevated and margins being increasingly squeezed, it's only a matter of time before manufacturers raise prices which will likely impact the domestic demand that has been fuelling growth in the sector.'

Experts say the weaker data may not be enough to dampen prospects of an interest rate hike by the Bank of England at their next meeting in November, but it could impact on further increases next year.

Commenting on the survey, Alan Clarke, head of European fixed income strategy at Scotiabank, said: 'The MPC seem pretty determined to hike in November, but it is going to require an improvement in the data to trigger another hike early in 2018, particularly if our view that inflation starts to slow fairly soon comes good.'

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