Knowledge & Insight

UK Manufacturing Growth

Wed 28 June 2017

The manufacturing sector may no longer be the engine room of the UK economy, but it still accounts for around 10% of GDP, so it remains a critical component of domestic output and is a bellwether for the country’s economic health and wellbeing.

Fastest growth in manufacturing since 2014

Amongst the mind-boggling range of monthly economic data, the Purchasing Managers’ Index published by the Chartered Institute of Procurement & Supply (CIPS) is regarded as a key statistic. And in May, the PMI showed that UK manufacturing grew at its fastest rate for over three years. By leaping from 54.2 in March to 57.3 in April, this closely-watched indicator confounded many forecasters, and gave rise to new optimism around the UK’s ability to weather the post-Brexit storm.

Main drivers of manufacturing growth

It can be tempting to read too much into data like this, which in reality is little more than a snapshot, yet it’s worth exploring the reasons behind the recent surge. Some commentators have been quick to point to the weak pound as the chief cause of the rise in demand for UK goods. But the flipside of a declining exchange rate is that imported raw materials (such as metals and petrochemicals) drive up manufacturers’ costs and damage competitiveness - so the case isn’t as clear cut as many might suggest. And whilst the report specifically named strong demand from Africa, Brazil, Europe and USA, it indicated that the rise in output was also driven by increased orders from domestic markets.

A cause for optimism

The rise in Manufacturing PMI is certainly a compelling good-news story, and it shines particularly brightly as it comes at a time when many well-respected commentators seem to be focussed on bad news. And this is a significant point, because when consistent bad news erodes confidence, it can become self-fulfilling.  So the integrity and strength of the CIPS data can serve as a powerful antidote.

Founded upon the responses of purchasing executives at more than 600 companies in the industrial sector, the index drills down into the heart of the sector’s performance – taking account of the volume of new orders, output and employment levels. So in contrast to the many stories foretelling a tough future after Brexit, this recent growth in the manufacturing PMI should restore investors’ confidence in UK firms.

A bright future?

It’s difficult to ignore such a strong performance, even if it spans only a relatively short period. Yet the real question is whether this level of performance can be sustained in the medium- to long- term. Whilst this depends in part on factors outside the control of UK manufacturers (such as fluctuating  exchange rates, the global economic climate, and the shape of trade deals in a post-Brexit world), there are a number of factors that lie within the control of UK firms - such as productivity, quality of output, and the ability to design and deliver innovative new products. And judging from recent performance, UK manufacturing appears to be well-positioned to leverage these assets to their advantage.

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