UK manufacturing shows small increase

UK manufacturing picked up moderately in October but stayed well below levels recorded earlier in the year, a survey revealed today.

The manufacturing purchasing managers' index (PMI) survey for October rose to 53.0, above City forecasts of 52.3. A reading of more than 50 signifies growth, while anything below shows a contraction.

Although the survey showed a pickup in activity last month, the pace of manufacturing expansion remained substantially below that recorded in the second quarter of the year.

Despite the improvement seen in the latest PMI survey, many companies said they were acting cautiously because of the continuing surge in the prices of raw material and the consequent pressure on profit margins.

Record oil prices and high demand for steel and other commodities from fast-expanding economies such as China helped to force input costs up at their sharpest rate since April 1995. The input prices index hit 73.5 from 68.1 in September.

Analysts said the fragile state of the manufacturing sector made it unlikely that the Bank of England would raise rates this week.

"The current softness of the manufacturing sector is another reason for the Bank of England to leave interest rates unchanged this week, although the central bank will not be happy to see manufacturers' output prices rising at an increased rate in October," Howard Archer, the chief UK economist with the consultancy Global Insight, said.

Most City economists now believe that base rates of 4.75% have peaked for this year after five increases in borrowing costs since last November, when those costs stood at a 38-year low of 3.5%.

Economists have trimmed their interest rate expectations amid a cooling of the housing market and growing constraints on growth, particularly oil prices.

"There is no denying that the manufacturing sector has come under increasing pressure in recent months from higher interest rates, very strong oil prices, and at least a temporary slowdown in global growth," Mr Archer said.

"The overall strength of sterling this year has also been a concern for the sector, although it should benefit from the pound's current weakening to a nine-month low on its trade-weighted index."