Markit/CIPs PMI ends on a high, but input price pressure looms

Rob Dobson, senior economist at Markit and author of the UK Manufacturing PMI, said: "The UK manufacturing sector saw a truly spectacular end to 2010. The PMI rose to a 16-year high [58.3 in December] and strong export growth pushed rates of expansion in output and new orders to the highest since May. Job creation also stayed close to November's near survey record pace. "The latest data are consistent with manufacturing production rising at a quarterly rate close to 2.0%, which should generate a meaningful contribution from the sector to economic growth in the fourth quarter to offset likely weakness in other sectors. All of this points to manufacturing being a positive spur to economic recovery in the final quarter. "On the downside, the other stand-out figure was a survey record increase in average input costs. Manufacturers in sectors such as clothing, food products and chemicals were hit hard by demand exceeding supply for certain key inputs, as well as rising energy costs. The hawks on the Bank of England's Monetary Policy Committee will be further unnerved by these rising price pressures." Input costs have risen from -10% in 2009 to +20% during 2010. David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply, said: "The start of 2011 is likely to be 'all systems go' for UK manufacturing, with December's PMI demonstrating a huge turnaround of fortunes compared with two years ago. The accelerated growth of new orders in export markets and recent survey record rates of increase in manufacturing jobs are a positive end to the year. They also bode well for a continuation of the manufacturing-led economic recovery next year. "Before we breathe a sigh of relief, last month was not without its challenges. Adverse weather conditions contributed to longer vendor lead times, while surging demand for certain goods has depleted stocks, leading some purchasers to try and replenish inventories. There are also ongoing efforts to guard against rising cost inflation and possible further winter disruption to the supply chain by buying early. With this and also customers likely to see further costs passed down following the VAT increase in January, the economy will still see some pressures."