UK manufacturing activity increased unexpectedly in January, a survey has revealed, but economists warned it was far too early to conclude the overall economy might avoid further contraction and technical recession in the first quarter.
The Chartered Institute of Purchasing and Supply's (CIPS) purchasing managers' index for UK manufacturing rose from 49.7 in December to 52.1 in January on a seasonally-adjusted basis. This return to expansionary territory followed three consecutive months at sub-50 levels which signal contraction.
The PMI is a composite measure of activity which includes output, new orders, employment, suppliers' delivery times, and stocks of goods purchased.
The CIPS survey signalled manufacturers' new orders grew in January, after six consecutive months of decline. Output grew at its fastest pace in 10 months.
The survey pointed to a very marginal rise in manufacturing employment, after three consecutive months of job-shedding by the sector. But it showed the first increase in stocks of finished goods since April 2008, which could weigh on future output.
Official data last week showed UK gross domestic product fell 0.2% in the final quarter of 2011. A second consecutive quarter of contraction in the opening three months of this year would put the UK back in recession.
Howard Archer, chief UK economist at consultancy IHS Global Insight, was encouraged by the manufacturing survey.
However, he cited uncertainty over whether the improvement would last and noted the first-quarter movement in GDP would depend mainly on what happened to the dominant services sector and consumer spending.
Mr Archer said: "The survey indicates that life got better for UK manufacturers at the start of 2012, after a pretty dismal end to 2011. This suggests there is a very decent chance the manufacturing sector will return to growth in the first quarter of 2012, after contributing significantly to overall GDP contraction in the fourth quarter."
However, he cautioned: "Whether or not the UK can avoid further contraction in the first quarter will depend mainly on what happens to services output and consumer spending."
He added: "Manufacturers still face very challenging domestic and international conditions, so it remains to be seen whether they can build on their improved start to 2012."
Samuel Tombs, UK economist at consultancy Capital Economics, said the survey "added to evidence that the industrial recovery got back on track at the start of this year".
But he added: "The survey brought signs that the pick-up in output growth will not last."
He noted the rise in stocks of finished goods meant "not all of what was produced was sold". He cited slower growth in new export orders in the survey, and said domestic consumer and investment demand was "likely to struggle this year".
Mr Tombs also noted an improvement in the Confederation of British Industry's output balance for UK manufacturing in January "reflected a particularly sharp upswing in output in the chemicals sector, following sharp falls in prior months".
Mr Tombs added: "With only one month of the quarter having passed and the headwinds from the eurozone likely to intensify, it is far too early to say that the economy has avoided a renewed recession."
A poll published by news agency Reuters yesterday showed economists expect the Bank of England's Monetary Policy Committee to increase the scale of its quantitative easing programme by a further £50billion to £325bn when it concludes its two-day February meeting next Thursday.
This programme, implemented through the purchase of Government and corporate bonds using new money created electronically by the Bank, is aimed at boosting money supply and stimulating the economy.
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