July 4, 2006 | posted by Michael Baxter in Uncategorized |

Has the UK found its panacea? With our indebted consumers and government, the UK has lost the twin pillars that held up the economy during a time where all around the Eurozone there were troubles. For the UK to continue its expansion, we need to sell more to our cousins in Europe. That requires a eurozone recovery and waiting for that feels a little like waiting for the tooth fairy.

But, bit by bit, a trickle of good news from Europe and the flow of our manufacturing exports have risen from a tiny trickle to a more substantial trickle. Let’s not get too carried away just yet.

Now, the latest report from the Chartered Institute of Purchasing and Supply has revealed the highest score for its Purchasing Managers Index since July 04. The output index leapt to a level suggesting the highest of growth in output since October 2003.

The CIPS Purchasing Managers Index for June did in fact hit 55.1, compared with 53.5 last month. A score of 50 or more suggests that the sector is growing. As recently as March the index was at just 51.1, only a smidgen away from contraction.

Roy Ayliffe, Director of Professional Practice at CIPS, said: “The recovery of UK manufacturing was unremitting this month amidst reports from purchasing managers in the sector of robust growth in production and new business.”

CIPS also said “Companies reported benefits from stronger economic conditions in the Eurozone, which led to growth of new orders from Germany, France, Italy and Spain.”

Four weeks ago, we revealed data from the EEF that output indicators for the sector are now at the highest level for ten years.

The CBI has also been making bullish noises about manufacturing of late, with its industrial trends survey hitting its highest score since February 2005.

Before you celebrate the return of manufacturing, here are some thoughts to make the bubbles in your champagne glass sink without trace.

Sure the CBI order book survey was the highest its been for some time, but the difference between purchasing managers saying orders were up versus those saying they were down is still negative (-14 in June). In fact the index has been in negative territory since August 2004.

The economic think tank, Capital Economics, took a relatively sanguine view of the CIPS figures saying: “We doubt that the industrial recovery will be quite that strong, not least because this survey has been more optimistic than the official data for much of the last year. And the recent news that manufacturing average earnings rose at an annual rate of 6.3% in the three months to April, together with the rise in the price paid balance to a 17 month high, suggests that manufacturers may be struggling to control costs.”

And within the CIPS report there was bad news lurking. We all know raw material costs such as oil are high - that’s caused by the commodities boom. But up to now these higher costs have not filtered through to the rest of the economy. But the CIPS report said: “There were reports that improved demand had encouraged some manufacturers to raise their charges.”

One of the big problem with UK manufacturing, however, is the success enjoyed by our services. This has meant that the manufacturing sector faces tougher competition in the labour market - and unit labour costs are too high for many manufactures to be able to compete.

The other big problem lies with the pound. What UK manufacturing really needs is to see a fall in Sterling. And paradoxically, we can see room for optimism here in the trend among central bankers across the globe to raise interest rates. Fears that the rate of interest is to rise worldwide are behind the recent market turmoil, but for the UK, it could be good news. The general feeling out there is that despite expected rate rises in the Eurozone, US and Japan, the UK rate is more likely than not to stay firm, or at the very least see much smaller rises. We suspect that the high rate of interest in the UK relative to other major territories has been one of the main reasons for a strong pound. As the rate of interest differential falls in favour of the UK, the UK’s currency becomes more likely to fall.