Sector slows but prices still increase at record rate

The Markit/CIPS manufacturing PMI headline index fell to a five-month low of 57.1 in March from a downwardly revised 60.9 in February. Analysts had expected only a slight dip to 60.6.

The output prices index, however, rose to 65.2 in March from 63.6 in February, the highest since the series began in 1999.

The survey also showed that companies’ raw materials costs continued to rise in March, albeit at a slightly slower rate than in February. And companies continued to take on new staff, though not at February’s record pace.

Rising job creation and further growth in the manufacturing sector are encouraging signs. However, the economic outlook is still uncertain and the slowdown in the pace of expansion in the manufacturing sector will not ease the dilemma facing Bank of England policymakers over how to tackle persistently above-target inflation without harming economic recovery.

The pound fell on the figures and gilts briefly pared losses, but analysts noted that the manufacturing sector was still on course to make a strong positive contribution to first-quarter GDP growth.

“In general, the manufacturing sector still looks in pretty decent shape, but the change in the month is a lot bigger than expected and that cannot but encourage chatter about some underlying loss of momentum,” said Ross Walker, economist at RBS Financial Markets.

Slower growth in manufacturing – which has so far been the one bright spot in the economy – is likely to reinforce expectations the central bank will hold off raising interest rates until the recovery is on a firmer footing.

Money markets have pushed back expectations for the first rise in interest rates from a record low 0.5 per cent to August from May, largely as a result of weak news on consumer activity.

“The Monetary Policy Committee’s balancing act between growth and inflation has perhaps become even more precarious,” said Markit economist Rob Dobson.

Markit said the slowdown in demand was most pronounced in the consumer goods sector, which was virtually stagnant, and indicated a fall in domestic orders for such goods.