February 1, 2010 / 9:35 AM / 10 years ago

Manufacturing tempered by lending dip

LONDON (Reuters) - Manufacturers revved up the pace of activity to a 15-year high last month, according to a survey on Monday, suggesting the economy made a strong start to 2010 after a limp return to growth at the end of last year.

A worker operates machinery at the Closed Loop recycling plant in Dagenham east London February 17, 2009. REUTERS/Luke MacGregor (

However, a slowdown in the pace of mortgage lending and the first fall in mortgage approvals in more than a year injected some uncertainty about the sustainability of any upturn.

Market reaction to the manufacturing figures was muted as they merely reinforced the widely held view that the Bank of England will announce a pause in its 200 billion pound quantitative easing (QE) programme later this week. The CIPS/Markit manufacturing purchasing managers’ index jumped to 56.7 last month from an upwardly revised 54.6 in December, its highest since October 1994 and well above analysts’ forecasts for a reading of 54.0.

The improvement came after new orders rose at their fastest pace in six years — helped by stronger domestic and export demand — and output growth was the fastest since June 2006.

But analysts questioned the divergence between the PMI surveys and official data, as the PMI has signalled growth for several months but GDP figures showed the economy grew a lacklustre 0.1 percent in the final quarter of 2009.

“At face value (PMI) would appear to imply that the sector is at the start of a new purple patch, which we’re a little bit sceptical about,” said Philip Shaw, economist at Investec.

New orders rose at their fastest pace since January 2004, with an index reading of 60.4, with the improvement driven by the sharpest growth in export orders since data were first collected in 1996, suggesting the weak pound is giving a boost to manufacturers.

And the pick-up in demand meant many firms had to take on more staff, pushing the employment index above the 50-point level that separates expansion from contraction for the first time since April 2008.

There were also signs that inflation pressures are picking up, with input prices rising at the fastest pace since September 2008, reflecting higher commodity prices, while output prices accelerated at their fastest since October 2008.


However, figures from the Bank of England, also published on Monday, suggested money supply growth was still tight, and raised doubts about the sustainability of an upturn.

The central bank’s preferred measure of M4 — excluding intermediate and other financial corporations — dipped 0.5 percent in December, while headline M4 fell at its fastest monthly pace on record.

The Bank of England’s QE scheme was designed to pump money into the economy by buying assets with newly-created money.

The number of loans approved for house purchase fell to 59,023 in December from 60,045 in November, while mortgage lending growth also eased.

“While the factory figures are encouraging, it is difficult to peg recovery hopes on one month’s exporters’ data when domestic liquidity and demand conditions remain depressed at the peak of the policy stimulus,” said Lena Komileva, G7 market economist at Tullet Prebon.

“With the BoE widely expected to stop asset purchases this week, consumers face considerable uncertainty given the prospect of a higher cost of living, higher mortgage rates, and higher taxes, which puts the sustainability of the recovery at risk in the later part of the year.”

* Detailed PMI data are only available under licence from Markit and customers need to apply to Markit for a licence. For more details, see www.markit.com/ or call Markit on +44 20 7260 2454

Editing by Mike Peacock

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