Pace of expansion in manufacturing falls to lowest in nine months

BRITISH manufacturers have reported their weakest period of growth in nine months, confounding expectations for a further upturn in activity.

Releasing their latest Purchasing Managers' Survey, Royal Bank of Scotland and the Chartered Institute of Purchasing & Supply (CIPS) said the UK manufacturing sector performed better last year than in 2005, with higher rates of growth for production and new business - but last year's performance did not match 2004's.

The survey's main index eased to 51.9 in December from a downwardly revised 52.5 in November, notching up its lowest reading since last March. Although any reading above 50 indicates expansion, analysts had been looking for a December figure of 52.6.

The result takes the shine off Lloyds TSB Scotland's latest Business Monitor, published today, which shows Scottish manufacturing firms reporting a strong quarter until the end of November, helping the wider Scottish economy to outpace its trend growth rate during 2006.

Lloyds TSB also forecasts above-average growth of 2.25 per cent in 2007, underpinning the findings of recent research by both HBOS and RBS.

All three reports suggest the Scottish economy is in rude health despite fears over staff shortages, higher interest rates and rising input costs.

Lloyds TSB said 53 per cent of the 2,000 or so indigenous companies it surveyed had seen their sales increase in the three months to the end of November, against 19 per cent who reported a decrease. Some 28 per cent experienced static turnover.

The bank said the resulting net balance of plus 34 per cent - the difference between those reporting a rise and those posting a fall - was the second best result in the nine years it has been running its Business Monitor.

Mirroring the trend of the previous survey, manufacturing companies fared better than service sector firms. For the three-month period, the net balance on turnover of production businesses was plus 39 per cent, against plus 28 per cent in the previous quarter and just 5 per cent a year earlier.

The comparable figures on the services front were plus 30, up from plus 20 and plus 9 per cent, respectively.

Scottish Executive data for the second quarter of 2006 showed that output in the production sector, of which manufacturing accounts for the lion's share, had dipped 0.2 per cent, suggesting a turnaround may have taken place in the latter half of the year.

Professor Donald MacRae, chief economist at Lloyds TSB Scotland, said Scottish businesses were benefiting from a pick-up in growth from both the UK and eurozone economies.

He said: "The Scottish economy continues to grow above its trend rate while expectations for future growth continue at high levels. Despite recent increases, both the rates of interest and inflation remain at historically low levels."

The report pointed to GDP growth of "around" 2.25 per cent in 2007. The figure is slightly above the 2.2 per cent outlined in a report last month from Bank of Scotland and is broadly in line with Fraser of Allander Institute's prediction of 2.3 per cent. Fraser of Allander, which is based at Strathclyde University, compiles the Business Monitor on behalf of Lloyds TSB.

Last month, RBS highlighted "robust" growth across Scotland's private sector. While November's PMI output index slipped to 54.8 from 55.5 the month before, it has been on the right side of the crucial 50 mark for 41 months on the trot.

Some companies polled by Lloyds TSB raised concerns over availability of staff. This, the bank said, was the result of rising levels of orders and new business combined with low unemployment and strong demand. Cost pressures were found to have eased since their summer highs.

Household spending is forecast to rise by 4.4 per cent this year, slightly outstripping the increase in disposable income.

The RBS/CIPS Purchasing Managers' Survey is based on questionnaires sent to purchasing executives in 620 industrial companies across the UK.

RBS chief economist Andrew McLaughlin said: "The final quarter of 2006 has seen the expansion of the UK manufacturing sector gradually slip back to its trend level following the surprisingly robust performance seen in the middle of the year."

The index for incoming new orders posted a 19th successive month of growth but eased slightly to 53.1, its weakest since August.

Yesterday's report is unlikely to alter expectations for higher interest rates but policymakers may be mindful of any further signs of weakness in Britain's recovering manufacturing sector, especially among export markets. Growth in export orders softened last month to its weakest pace since August, the survey found, slipping to 51.5 from 52.5 in November.