By Daniel Hunter

The upturn in the UK manufacturing economy continued to build momentum at the start of the third quarter, with growth rates for production and new orders the highest since February 2011.

Although the domestic market remained prime source of new contract wins, manufacturers also reported a solid improvement in overseas demand.

The seasonally adjusted Markit/CIPS Purchasing Manager's Index (PMI) rose to a 28-month high of 54.6 in July, up from a revised reading of 52.9 in June (originally published as 52.5). The PMI has remained above the neutral 50.0 mark — signalling expansion — since April, with its level improving in each of the past five months.

Manufacturing production increased for the fourth month running in July, as growth of new orders continued to strengthen. Companies reported improved domestic and export demand. New export business rose at the fastest pace for two years, reflecting increased sales to Australia, China, the euro area, Kenya, Mexico, the Middle East, Nigeria, Russia and the US.

The upturn was led by strong and accelerated growth of output and new orders in the consumer goods sector. Rates of increase also picked up at intermediate and investment goods producers.

Stocks of finished products fell at the fastest rate for over three years in July, mainly due to efforts to meet rising sales requirements. Increased production also led to higher purchasing activity and a depletion of input stocks.

The combination of accelerated new order growth and lower stocks bodes well for the trend in output going forward. This was highlighted by the new orders to finished goods inventory ratio rising sharply to one of its highest levels in the survey history.

Manufacturing employment rose for the third successive month in July, with the rate of job growth reaching a two-year high. Solid increases were seen in the capital and consumer goods sectors. Payroll numbers rose in the intermediate goods sector for the first time in the year-to-date, although only slightly.

Inflationary pressures remained relatively subdued during the latest survey month. Although input costs and selling prices both rose moderately in July, rates of inflation were below their respective series averages.

“The much vaunted march of the makers has finally materialised with the UK manufacturing sector’s output growth hitting a 29-month high in July," David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply, said.

"Exports have been critical to this success, but it is the broad based nature of the sector’s performance which endorses the view we are on track for solid and accelerated growth in the coming months.

"The ability of British manufacturers to market themselves abroad was always seen as crucial to long-term success and so it has proved. New export business has grown at its quickest rate in two years in a sign that macro-economic conditions are improving. Domestic performance has also been strong.

"The consumer goods industry has led the recovery, however it is perhaps even more encouraging to see increasing output and orders in both the intermediate and investment goods industries as well. As a result, confidence is high, jobs growth climbed to a two-year peak and the relatively subdued nature of inflationary pressures rounds off a very good month for manufacturers.”