UK order books and output grew at fastest pace in 20 years while China’s year-long contraction ended
Stock markets soared on Monday as surveys of manufacturing output around the world gave the strongest indication yet that the richest countries are finally shaking off the after-effects of the financial crisis.
British manufacturing order books and output grew at their fastest in almost two decades while China, which has suffered a year-long contraction in manufacturing output, saw activity expand in August. Factory sectors in Spain and Italy returned to growth for the first time since 2011. Only France and India among the world’s biggest economies experienced falls in production and Paris will be comforted by indications that some areas of manufacturing stabilised during the summer.
India, though, appeared to be heading into deeper trouble after a fall in the rupee failed to arrest the country’s first contraction in manufacturing for more than four years.
The FTSE 100 jumped almost 100 points to 6507 with mining groups leading the charge. Rio Tinto and Anglo American saw a sharp rise in their values as investors bet on a more widespread use of iron, coal and nickel. The French Cac and German Dax also rose strongly.
George Osborne has taken comfort in recent months that the UK’s long-awaited recovery in manufacturing is under way. The services sector has expanded for more than a year, but the economy was unable to push ahead while construction and manufacturing contracted. Since the beginning of the year those sectors have stopped being a drag on growth and in recent months have added momentum to the growth figures.
The monthly snapshot from the Chartered Institute of Purchasing and Supply/Markit said the return of confidence, a rosier outlook for exporters and demand for new products had all helped UK factories in August.
The purchasing managers index (PMI) rose from 54.8 in July to 57.2 last month – its highest level in two and a half years.
The PMI is made up of various measures of industrial activity including orders, output, employment, stock levels and inflationary pressure.
Rob Dobson, senior economist at survey compilers Markit, said orders and output were growing at their fastest since the summer of 1994, a period when the UK was recovering from recession.
He said: “The UK’s factories are booming again. Orders and output are growing at the fastest rates for almost 20 years, as rising demand from domestic customers is being accompanied by a return to growth of our largest trading partner, the eurozone.”
Meanwhile, Britain’s high streets have performed well this year and the British Retail Consortium said the trend continued into August. Sales rose 3.6% on a year ago as shops expanded to cope with rising demand. The BRC said the figures augured well for the autumn because they were strong enough to show an improvement on last August, when the Olympics was at its height.
Strong manufacturing growth has been accompanied by an increase in price pressures, the Markit report said. Companies reported rising costs for fuel and raw materials, with its input prices index up by 10.4 points on the month – the second highest rise in the survey’s history.
The potential for a rise in inflation, coupled with analysis showing that much of the boost to the economy has been based on consumer spending while investment remained on hold, has persuaded some analysts to conclude that the quickening recovery is unsustainable.
Trevor Greetham, a director at Fidelity Worldwide Investment, accused the government of “unleashing the beast” of cheap mortgages to foster a dash for growth before the 2015 election.
He said a large part of the current recovery could be traced back to the government’s Funding for Lending Scheme, which offers cheap money to banks, and the housing market scheme Help to Buy, which have channelled money into mortgages at the expense of business lending.
The TUC said the benefits of the recovery were being swallowed up by business managers and shareholders, leaving workers worse off.
Speaking before the TUC’s annual conference next week, general secretary Frances O’Grady pointed out that UK workers have suffered a huge squeeze on their incomes over the last five years, with average pay falling by 6.3% in real terms.
She said many have remained on frozen or low pay while inflation has jumped, leaving someone earning £26,000 a year more than £30 a week worse off in real terms.
The study, part of the TUC’s Britain Needs a Pay Rise campaign, compared hourly pay rates in 2007 (at 2012 prices) with those in 2012, and “shows the extent of the pay squeeze being felt by families across the UK as incomes fail to keep pace with rising prices”.
O’Grady said the north-west was the hardest hit region in the UK following a fall in average hourly pay from £11.43 in 2007 to £10.52 in 2012 – an 8% drop in real terms.
France, India and Russia struggle
France’s manufacturing sector is struggling to recover after a difficult year of redundancies at the state-backed car makers Renault and Peugeot Citroën and high-profile steel works closures.
While eurozone manufacturing activity expanded for a second successive month in August, in France the purchasing managers index was confirmed at 49.7, where a figure below 50 shows activity contracted. It was the only eurozone country where the measure of activity failed to improve.
However, output has fallen in France over the last four years far less than some other eurozone countries, and the slow rate of contraction was read by many analysts as a sign that the recession is bottoming out.
India also suffered a slowdown in manufacturing output in August, though much of the blame was heaped on the administration of prime minister Manmohan Singh, a former economics professor, who has run the country since 2004 and was re-elected in May.
The HSBC manufacturing purchasing managers’ index fell to 48.5 after a drop in domestic and export orders. In the last two years GDP growth has more than halved to 4.4% and investment funds have flowed out of the country. The central bank has hiked interest rates, making it tougher for businesses and consumers to borrow.
India was not alone among the “Bric” countries to suffer a contraction in manufacturing. Russia’s output also fell, largely because of government neglect and a high rouble. A drop in oil revenues exposed the weakness in manufacturing weakness, leading Vladimir Putin to suggest he may free several jailed business leaders to boost output and growth.
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