Some welcome economic news as manufacturing sector shows growth

The new year kicked off with some welcome news on the economy as figures revealed activity in the manufacturing sector surged to a 15-month high in December.

The latest Markit/CIPS purchasing managers' index (PMI) showed a headline reading of 51.4 in December, marking a return to growth for the first time since March and the highest reading since September 2011.

Manufacturers were boosted by increased demand from British firms, which helped output from the sector rise at the fastest pace for 20 months, offsetting an ongoing slump in orders from the crisis-hit eurozone.

The closely-watched survey suggests the manufacturing sector contracted overall in the fourth quarter despite the December recovery, but experts said it raises hopes that manufacturing output has stabilised.

Howard Archer, chief European & UK economist at IHS Global Insight, said the manufacturing improvement may also help the wider economy avoid an end-of-year contraction.

"The marked pick-up in manufacturing activity in December is a significant boost to hopes that the economy was at least flat in the fourth quarter and could even have grown marginally," he said.

The December reading comes after a difficult year for Britain's manufacturing sector, which has suffered as demand from the UK's main export partner, the eurozone, has been hit by economic troubles.

The average PMI reading in the fourth quarter remained below the no-change level of 50 - which separates expansion from contraction - but higher than that seen in the third quarter and above the average over 2012 as a whole.

Manufacturers warned the sector was not out of the woods yet, with economic uncertainty continuing to hang over the UK and Europe.

Lee Hopley, chief economist at manufacturers' organisation EEF, said: "The rise in output and orders at the end of last year is a positive signal that the sector can continue to recover in the year ahead, but the strength of that recovery will, as ever, depend on what happens in other parts of the world.

"2013 is likely to remain challenging and exporters, in particular, will be hoping to see stability in the eurozone and signs that demand will continue to hold up in the US and emerging economies in the coming months."

The Markit/CIPS survey showed there were signs of spare capacity, with another decrease in backlogs of work last month.

There was also some worrying inflation indicators, with output prices from the manufacturing sector rising at its fastest rate since April.

Employment in the sector fell for the eighth month running in December, but the rate of job losses was the least marked for four months.

This offers hope the UK's labour market could carry over its "surprising resilience of 2012 into 2013", according to Mr Archer.

PA