UK manufacturing sector holds steady but weak pound pushes purchase costs to six-year high

Britain's manufacturing sector contracted slightly more than expected in October, despite a steady growth in output, according to a survey by IHS Markit and the Chartered Institute of Procurement & Supply (CIPS) released on Tuesday (1 November).

The Markit's Purchasing Managers' Index (PMI) fell from 55.5 in September to 54.3 in October, compared with analysts' expectations for a 54.5 reading, but remained well above its long-run average of 51.5.

New order volumes increased for the third consecutive month and at a pace close to September's recent high, the report added, while companies reported higher demand from both domestic and export clients.

"The UK manufacturing sector remained on a firm footing in October and should return to growth in the fourth quarter," said Rob Dobson, senior economist at IHS Markit.

"Despite slowing from September's highs, growth of output and new orders continued to defy expectations, rising at marked rates and supporting the fastest job creation in a year."

The weakening pound delivered an important boost to manufacturers, which reported an increase in the inflows of new export business, resulting in new orders from the USA, the European Union and China.

Sterling's ongoing weakness, however, translated into higher import prices and increased costs for products based on dollar-denominated commodities such as oil. Some 90% of the companies that reported an increase in average purchasing costs, cited the sterling exchange rate as the main contributing factor.

As a result, purchase price inflation subsequently rose its highest level in almost six years and to its fourth-highest level since the survey began in 1992.

"The downside of the weaker currency is becoming increasingly evident with increased import prices leading to one of the steepest rises in purchasing costs in the near 25-year survey history," Dobson added.

The price hikes resulted in manufacturers passing on higher prices to their customers as charges rose for the sixth consecutive month and to the steepest degree since June 2011.

"With rates of inflation moving higher, policymakers will need to keep a close watch and possibly change tack if needed to stay well within their targets," said CIPS chief executive David Noble.