By Daniel Hunter

The UK manufacturing sector continued its positive start to the second quarter of 2013. After returning to growth in April, May saw operating conditions improve at the fastest pace in over a year, with growth of production and new orders both accelerating.

The domestic market was the main driver of new order inflows, although new export business also contributed with a modest increase. At 51.3 in May, up from a revised 50.2 in April, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) posted its highest reading since March 2012 and remained above the neutral 50.0 mark for the second straight month.

The expansion of manufacturing output was broad- based in May, with growth registered by the consumer, intermediate and investment goods sectors. The strongest performance was seen at consumer goods producers. UK manufacturers generally linked higher output to improved new order inflows, successful new product launches and efforts to clear backlogs of work.

Incoming new orders rose for the third consecutive month in May, led by a solid improvement in domestic market conditions. New export orders also rose during the latest survey period, with reports of higher demand from North America, East Asia, Russia, Germany and France.

May data also pointed to a mildly positive outlook for the manufacturing sector. Job creation was recorded for the first time in four months, with companies reporting that the recent upturn in production had led to new hirings. Meanwhile, the new orders-to-finished goods inventory ratio surged to a 27-month high, suggesting that output may need to be raised in coming months to reduce the pressure on stocks of finished products.

Average input prices declined for the second month in a row during May. This reflected solid decreases at intermediate and investment goods producers, who benefited from lower costs for commodities, fuels and metals. In contrast, consumer goods manufacturers reported a marked increase in purchasing costs, mainly due to higher dairy, paper and timber prices.

“The UK manufacturing sector had a spring in its step in May, as a brightening domestic market led to faster growth of output and new orders," Rob Dobson, Senior Economist at survey compilers Markit, said.

"One of the more positive features of the expansion is its broad-base, with producers of consumer, intermediate and investment goods all reporting stronger output growth.

“Output is also likely to be raised further in the coming months, as firms refill warehouses after stronger than expected demand has led to a sharp depletion in finished goods stocks. The tentative return to job creation in the sector in May also suggests that manufacturers are becoming more confident in the outlook.

“Although the domestic market was the main impetus to new order inflows, demand from overseas markets at least managed to keep its head above water, as higher demand from Asia, North America and pockets of the Eurozone, notably Germany, kept the recovery in new export orders alive.

“Following the solid growth registered by the service sector in the first quarter GDP numbers, signs that the manufacturing sector is also recovering will add further weight to the Bank of England’s decision to wait-and-see before adding to its accommodative policy stance.”

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