By Marcus Leach

The UK manufacturing sector showed signs of stabilisation at the end of 2011, with production broadly unchanged in December, following back-to- back contractions, and the rate of decline in new orders slowed as the trend in new exports strengthened.

Weakness was mainly centred on the intermediate goods sector, as growth of output and new orders was recorded at both consumer and investment goods producers.

The seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) rose to 49.6 in December, up from a revised reading of 47.7 in November.

The PMI has nonetheless remained below the 50.0 no-change mark throughout Q4 2011 and its average during this quarter is the weakest since Q2 2009.

With levels of total new work falling for the sixth month in a row, companies registering an increase in output generally linked it to higher foreign demand and efforts to clear backlogs of work.

New export orders rose for the first time in five months in December, reflecting increased levels of new work from clients in Germany, East Europe and China. The overall rate of improvement was the fastest since April, but well below the series-record high reached one year ago.

Outstanding business fell for the eleventh consecutive month. The rate of depletion was broadly unchanged from November, when backlogs fell at the quickest pace since August 2009.

Price and supply-chain pressures remained relatively subdued in December. Average input costs fell for the second successive month, with the rate of decline accelerating to the most marked since June 2009. Companies reported lower prices for chemicals, paper, plastics and steel.

Factory gate prices rose only moderately and to the least marked extent during the current 26-month period of inflation. Companies indicated that weak demand and strong competition had restricted charge increases.

Shortages of certain raw materials and low stock holdings at suppliers led to further lengthening of average vendor lead times during December. However, the extent of the increase was only modest and among the weakest during the current near two-and-a-half year sequence of deterioration.

UK manufacturers reported further depletion of inventory holdings in December, with stocks of purchases and finished goods both falling over the month. However, the rates of depletion in holdings eased in both cases.

Slower reductions to input stocks partly reflected a moderate increase in purchasing activity during December.

“December brought some brighter news for UK manufacturers. The level of production stabilised following contractions in October and November as a solid upsurge in new export business countered some of the weakness in the domestic market," Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI, said.

"Job losses were also less widespread than November, suggesting that pessimism about the coming year may have lifted a little.

“However, over the fourth quarter as a whole, producers reported their worst performance since the second quarter of 2009. Manufacturing will therefore likely be a drag on the economy in the closing months of the year. Looking ahead, manufacturers are currently relying heavily on backlogs of work to prop up production. This is only a temporary fix, and the trend in overall order books needs to improve if the sector is to avoid a protracted period of lacklustre performance.

“Price and supply-chain pressures are still relatively muted though, and this maintains some scope for further stimulus from the Bank of England. The survey will do little to change expectations that the Bank will need to step up its asset purchase programme in the new year.”

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