January 3, 2017 / 11:36 AM / 7 months ago

UPDATE 1-UK manufacturing growth unexpectedly hits 2-1/2-year high - PMI

3 Min Read

* UK manufacturing PMI hits highest since June 2014

* New export orders boosted by sterling's post-Brexit vote fall

* But inflation pressures continue to rise

* Analysts cautious about long-term health of UK economy (Adds reaction)

By Andy Bruce

LONDON, Jan 3 (Reuters) - British manufacturing grew at its fastest pace in two and a half years high last month, adding to signs that the economy ended 2016 strongly despite the shock of June's Brexit vote, a survey showed on Tuesday.

The Markit/CIPS UK Manufacturing Purchasing Managers Index (PMI) rose to 56.1, the strongest reading since June 2014, from 53.6 in November, helped by orders from home and abroad.

That exceeded all forecasts in a Reuters poll of economists which pointed to a slowdown to 53.1, and boosted sterling to a two week high against the euro.

Britain's economy has fared much better than many economists predicted since the vote to leave the European Union, with consumer spending strong and companies performing well.

But the manufacturing PMI showed rising cost pressures on factories, something that is likely to feed increasingly into consumer prices.

Survey compiler IHS Markit said the manufacturing output appeared to be rising at a strong quarterly pace of around 1.5 percent, with orders boosted by sterling's plunge after the Brexit vote.

IHS Markit's euro zone PMIs showed manufacturing growth there hit a more than five-year high, similarly boosted by an influx of new orders.

But analysts were wary about the outlook for 2017 and said official data for British manufacturing has been weaker than the PMI surveys have suggested.

"UK manufacturing is benefiting from both continued brisk growth in domestic demand as well as improving global demand, but this momentum likely will peter out in 2017," said Samuel Tombs, economist at Pantheon Macroeconomics.

Rob Dobson, senior economist at IHS Markit, said higher factory costs were the downside of the pound's fall which left it down around 10 percent on a trade-weighted basis since June.

"Of the companies citing a cause of higher costs, 75 percent linked the increase to the exchange rate," Dobson said.

Trade credit insurer Euler Hermes warned manufacturers were nervous about rising input costs that were putting pressure on companies' cash flow.

The Bank of England is also watching inflation pressures closely. Although it is willing to tolerate some overshoot of its 2 percent inflation target while the pound's fall since last year feeds through into prices, it has warned there are limits.

Britain's economy looks on track to expand by more than 2 percent in 2016 - faster than almost all other big advanced economies except perhaps the United States.

Economists polled by Reuters expect Britain's growth rate to more than halve in 2017 to 1.1 percent. (Editing by Larry King and Alison Williams)

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