Manufacturing’s flicker of hope adds to signs of a slow recovery

The Markit/CIPS Manufacturing Purchasing Managers’ Index (PMI) rose to 49.8 in April from an upwardly revised 48.6 in March, putting the sector within a whisker of the 50 line that separates growth from contraction.

Economists had expected a much weaker reading of around 48.5.

Yorkshire Bank economist Tom Vosa said the numbers were better than expected, but still remain below the 50 break even level.

He added that the data is consistent with the idea that the economy continues to flatline, although there is some hope in the news that there are signs of a rise in orders, particularly export orders.

“We’ll have to wait until May’s data to be sure,” he added.

The economy grew by 0.3 per cent in the first quarter and analysts hope that the signs of a recovery in manufacturing, which accounts for around a tenth of Britain’s gross domestic product, herald the start of a stronger second quarter.

Although the latest data points to an economy slowly gathering momentum, it also shows that the road to recovery will not be easy.

Chancellor George Osborne urged the Bank of England’s new financial regulators not to jeopardise a recovery by forcing banks to ramp up their capital buffers too quickly.

Rob Wood, economist at Berenberg Bank, said: “It will be a rough ride, but there are chinks of light that mean a return to modest growth is likely towards the end of the year.”

He expects that the manufacturing sector will probably continue to weigh on GDP growth for a couple of quarters.

April’s improvement in factory activity was helped by the first expansion in new orders since January.

New export orders rose for the first time in more than a year and at the fastest pace since July 2011, on the back of increased sales to North America, the Middle East, Latin America and Australia.

But demand from the eurozone, the main market for British exports, remained weak.

Howard Archer, economist at IHS Global Insight, said: “Domestic demand for manufactured goods is handicapped by current muted investment intentions and tightening public spending.”

He also noted that people’s budgets have come under renewed pressure from a recent rise in inflation and slow wage growth.

“On top of this, a still uncertain and difficult economic environment is likely causing some orders to be delayed or even cancelled,” said Mr Archer.

“Meanwhile, relatively muted and stuttering global economic growth, and eurozone economic weakness in particular, is a constraint to foreign demand for UK manufactured goods.”

Economists believe that the overall improvement in the economy so far this year after it shrank at the end of 2012 will deter the Bank of England from approving more asset purchases next week.

More action is likely after the bank’s new governor, Mark Carney, takes over in July.

Yesterday a senior central banker said the economy is starting to mend.

Bank of England deputy governor Paul Tucker said: “If we can just sustain it for a few more quarters, we really can begin to turn the corner again.

“I think there’s a long way to go but there’s certainly reason for hope.”

Rob Dobson, at Markit, said: “It is welcome to see the sector showing signs of stabilising in April.

“With forward-looking indicators such as new orders and the demand-to-inventory ratio also ticking higher, the sector should at least be less of a drag on broader GDP growth in the second quarter.

“Manufacturers report that the domestic market is just about holding its head above water, but was still a key cause of disappointingly weak demand, while a solid improvement in new export orders was the real surprise.”

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