By Daniel Hunter

UK manufacturing production continued to expand at the start of 2013, following a further increase in new orders and ongoing efforts to clear backlogs of work. The labour market also continued to stabilise following the job losses seen through much of the middle of last year.

At 50.8 in January, edging lower from December’s 15-month high of 51.2, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) remained above the neutral 50.0 mark for the second month running.

Manufacturing output expanded at the fastest pace since September 2011. This mainly reflected a robust increase in consumer goods production, although output also rose at intermediate goods producers. In contrast, investment goods output fell for the eighth time in the past nine months.

Companies reported a marginal increase in new orders for the third successive month, which some attributed to improved inflows of new business from the domestic market. This offset a further reduction in new export orders, which fell for the thirteenth month in a row. Companies linked lower volumes of new work from overseas to the ongoing weakness of markets in mainland Europe.

With new orders rising only marginally during the latest survey month, companies supported production volumes through the depletion of backlogs of work. Outstanding business declined at a substantial pace. There were also reports of companies settling existing contracts from inventories, leading to a reduction in finished goods holdings for the tenth month running.

Average input prices rose for the fifth successive month in January, with costs rising across the consumer, intermediate and investment goods sectors. Companies reported higher prices paid for chemicals, energy, food products, metals, packaging and plastics.

Part of the increase in costs was passed on to clients in the form of higher average selling prices. Charges rose for the thirty-ninth successive month, although January’s rate of inflation was below the average for the period of increase. A number of companies noted that generally subdued market conditions had restricted price rises.

“A second consecutive month of improving business conditions in the manufacturing sector is an encouraging start to 2013. Companies reported that output growth gathered further momentum, reaching a sixteen-month high, suggesting that the sector could help lift the economy from the slide back into contraction late last year," Rob Dobson, Senior Economist at survey compilers Markit.

“A small gain in employment also suggests that some firms are becoming slightly less focused on cost reduction amid signs of stabilising order books, which should hopefully lead to further production growth in February. Export orders are still declining, but Sterling’s weakness and indications of firming demand in key export markets such as Germany and emerging markets like China may filter through and lift sales in coming months.

“However, with manufacturing only accounting for around 10% of the economy, the survey will do little to assuage fears of a triple-dip recession unless accompanied by an improvement in the services sector, which contracted at the fastest rate for two years in December.”

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