Manufacturing: What the economists say

Economists believe that the Bank of England will now decide against introducing new measures to stimulate the UK economy, when its monetary policy committee meets this week. Andrew Goodwin, senior economic advisor to the Ernst & Young Item Club More good news for the UK economy with a strong start to Q4 following hard on the heels of last week's stronger than expected GDP data for Q3. While the first rise in the headline index for five months is a positive in itself, arguably of even greater importance is the broad-based strength in the more detailed results. The pickup in output points to strong growth momentum at the beginning of Q4. Meanwhile the surge in export orders suggests that the pickup in activity will have some legs. Indeed better news on exports is particularly important given the headwinds buffeting the domestic economy, in particular the public spending cuts. If last week's GDP data was not enough to head off the possibility of the Bank of England implementing further QE at this week's meeting, then these figures will surely be the final nail in the coffin. Though the recent GDP data might exaggerate the underlying strength of the economy, it is clear that the recovery still has reasonable momentum behind it, and at this stage there is no compelling case for the MPC to implement any further stimulus. However, at the same time it is too early to consider any policy tightening and we expect the Bank Rate to remain at current levels for a prolonged period." James Knightley of ING The UK manufacturing PMI has risen to 54.9 from 53.5, versus market expectations of a fall to 53.1. This is the first increase in the series since May, while output jumped by nearly two full points to 56.4 from 54.5 – the first increase since March. The employment component is also at strong levels as well so, all in all, this report confirms that the improving picture painted by last week's good GDP data has continued into the final quarter of the year. It will also provide further ammunition for the government to argue that the economy is strong enough to withstand the fiscal austerity measures they are implementing. Nonetheless, with the pain yet to bite from government spending cuts, we remain cautious and see growth slowing through 2011. As a result, we still see the possibility of further stimulus from the Bank of England in the form of additional quantitative easing next year. Howard Archer of IHS Global Insight The survey indicates that the manufacturing sector started the fourth quarter pretty well, thereby providing an early boost to hopes that overall GDP growth will show further resilience. It is vitally important that the UK recovery is on as firm a footing as possible before the fiscal tightening really starts to bite from early-2011, starting with January's VAT hike. Encouragingly, not only did the output index improve to a three-month high in October, but the more-forward looking elements of the survey showed improvement, boding relatively well for manufacturing expansion in the near term at least. New orders growth improved for a second month running, with export orders encouragingly improving to a five-month high. Backlogs of work were nearly flat in October after contracting since July. Meanwhile, employment in the sector rose at the fastest rate since June in October. This lifts hopes that the private sector may be able to compensate for the public sector job losses that are increasingly on the way. Input prices rose at the fastest rate for four months in October, putting upward pressure on manufacturers' margins. This led to a slight uptick in output prices but they still rose at the second slowest pace since March. This is an encouraging report; and, for now at least, it looks like the manufacturing sector is holding up well. The concern remains though that manufacturing activity will be pressurized increasingly over the coming months by stock rebuilding winding down, tighter fiscal policy weighing down on domestic demand, and slower global growth hitting foreign demand for UK products. Evidence that manufacturing activity was very decent in October reinforces belief that the Bank of England's monetary policy committee are unlikely to vote for a revival of quantitative easing at their November meeting which ends on Thursday. Meanwhile, it remains odds-on that they will keep interest rates down at 0.50% even though Andrew Sentance will undoubtedly argue that latest data support his case for a small rise in interest rates.