Surprise manufacturing rise ‘will not ease economic fears’

Yesterday’s Markit/Cips purchasing managers’ index – which is closely monitored – showed headline activity in the sector rose to 51.1 last month, from an upwardly revised 49.4 in August – 50 marking the divide between expansion and contraction.

The figures are unlikely to do much to ease jitters about the fragile economic recovery, especially as much of the growth was driven by factories tackling a backlog of work rather than accepting new orders.

However, economists believe the data is likely to tip the balance on the bank’s monetary policy committee (MPC) in favour of taking no action at this month’s rate-setting meeting, which ends on Thursday.

Howard Archer, chief UK and European economist at IHS Global Insight, said: “The better-than-feared manufacturing purchasing managers’ survey may tilt the odds towards the Bank of England holding off from more quantitative easing at the October MPC meeting. However, much could yet depend on the services purchasing managers’ survey out tomorrow given the sectors’ dominant role.” He added that it still seems probable the bank will enact another £50 billion of quantitative easing, most likely in November.

Rob Harbron, economist at the Centre for Economics and Business Research, said the data was “an optimistic light in the recent gloom of economic news”.

“However, the reading is below its pre-recession average, and indeed well under levels seen at the start of this year, highlighting how the state of the manufacturing sector remains fragile,” he added.

“The Bank of England still faces a finely balanced question on introducing a new round of quantitative easing. While this data is better news, it is likely not to be strong enough evidence to provide a compelling argument against a further injection. Expect more QE not this week, but before the end of 2011.”

Although September’s rise in manufacturing output was achieved largely by clearing backlogs at the fastest rate in two years, the level of new orders rose for the first time in three months in September. Companies linked this increase to a rise in domestic demand.

Data on the UK’s manufacturing export-led recovery was disappointing, as the levels of new export business reached their lowest point in nearly two-and-a-half years, with an index reading of 45. Companies reported falling demand from many of the major markets, including the US, eurozone, Asia and the Middle East, suggesting a broad-based cooling of demand.

That contrasts with figures published yesterday which showed Scotland’s exports growing faster than the wider economy. The Lloyds TSB Scotland business monitor said the exports picture was “much more encouraging” than the domestic one north of the Border, with a positive balance of 10 per cent of firms surveyed reporting exports had increased in the three months to August.

The UK PMI survey also showed the employment index stayed in negative territory for a third consecutive month, while input cost pressures eased.