LONDON (SHARECAST) - UK manufacturing was surprisingly strong in August but still posted its fourth straight month of contraction.
The Purchasing Manager’s Index (PMI) rose to 49.5, from 45.2 in July, only slightly below the 50 mark that separates expansion from contraction.
The figure was a four month high and better than the PMI reading of 46 pencilled in by analysts.
It was also stronger than statistics from the Eurozone, which showed a reading of 45.1, weaker than expected.
Economists said the stronger result should mean the Back of England would hold off adding to its £375bn quantitative easing scheme in September.
Output upAn improvement in output was driven by consumer goods producers, while intermediate goods companies also saw a marginal return to growth.
There was a broad stagnation of new orders but this was a marked improvement (to 49.9 from 41.8) on the severe decline seen in July as companies reported a modest increase in new work from domestic clients.
The rate of decline in new export orders (to 48.7 from 41.3) also eased sharply, despite weak demand from Europe.
Manufacturing employment (to 50.4 from 50.5) rose slightly for the second successive month in August, driven by small and medium-sized businesses taking on staff to clear backlogs.
Average input costs declined for the third month running during August (to 48.3 from 41), reflecting lower metal and plastic prices. There were also reports that weaker demand for raw materials and exchange rate factors had reduced the cost of certain inputs.
However, the rate of deflation eased sharply, mainly due to higher prices for oil and related by-products.
The gauge tracking output prices increased to 51.3 from 51.1.
Downbeat outlookThe PMI figures came just after manufacturers' body, the EEF, reported trading conditions over the last quarter had been the toughest since the end of the recession.
Rob Dobson, Senior Economist at Markit, which compiles the PMI, said overall demand remained too lacklustre to provide an imminent and sustained recovery, with investment spending still weak and domestic austerity ongoing.
"Long unsatisfied hopes that the manufacturing sector could export its way back to health also remained jilted by the marrying of a downturn in our largest export market to the onset of softer global economic growth," he said.
"The performance of the sector is therefore likely to remain subdued and volatile until underlying structural imbalances are resolved,” Dobson added.
Printing MoneyHoward Archer, Chief UK Economist at IHS, said that since the UK manufacturing figures were better than expected it reinforced belief that the Bank of England was likely to keep all aspects of monetary policy unchanged in September.
"With the Funding for Lending Scheme still in its early stages and July’s extension to Quantitative Easing due to run through to early November, it would likely need an extremely weak set of purchasing managers’ surveys this week to prompt the MPC into further action at this stage," he said.
"Nevertheless, a further £50bn of QE remains very much on the cards for the fourth quarter, taking the stock up to £425bn," Archer added.
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