By Marcus Leach

The UK manufacturing sector started 2012 on a positive footing. Output expanded at the fastest pace since last March, new orders rose following a period of contraction and payroll numbers stabilised.

Cost pressures continued to ease, as average input prices fell for the third straight month.

The seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose to an eight-month high of 52.1 in January, from a revised reading of 49.7 in December.

Manufacturing production expanded for the second successive month in January, supported by growth of new orders and the clearance of backlogs of work. Companies reported an increased willingness to spend among some UK clients and a further increase in new export orders.

Higher output also led to a slight rise in stocks of finished goods, the first increase since April 2008.

Foreign demand rose for the second month running in January, amid reports of improved order inflows from clients in Brazil, China, the Middle East and the US. However, the rate of increase was only moderate and less marked than one month earlier.

Average input prices declined for the third successive month in January, with the rate of deflation the steepest since June 2009. Manufacturers reported lower costs for commodities, metals, packaging, paper, plastics and timber.

Average output charges continued to rise at the start of 2012, but the rate of inflation was only moderate and the weakest during the current 27- month period of increase. A number of manufacturers reported that lower raw material costs, competitive pressure and weak pricing power had restricted charge increases.

January saw average vendor lead times lengthen for the third month running, reflecting shortages of certain inputs and shipping difficulties. Part of the deterioration in supplier performance also reflected increased demand for raw materials.

“January saw manufacturing kick-start back into life, with output expanding at the fastest pace since March 2011 and new orders rising for the first time in seven months," Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI said.

"Growth is nowhere near the surging highs of 12 months ago, but this is nonetheless a vast improvement on the 0.9% reduction in output seen at the end of last year. Manufacturing was a key area of weakness which caused the UK economy to contract in the final quarter, so this surprising rebound in January means a return to recession is by no means a certainty.

“Manufacturers will also be feeling the benefits of a further welcome drop in average input prices, which fell at the fastest pace since mid-2009. Taken alongside slower increases in factory gate prices, this is consistent with the Bank of England’s view that inflationary pressures will subside during the coming year.

"This will provide leeway on the price front if the Bank does step up its asset purchase programme in future months, as widely expected, although the upturn in the PMI may cause some members of the MPC to wonder if further stimulus is still warranted.”

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