U.K. Domestic Demand Helps Manufacturing Sustain Growth Momentum

(Bloomberg) -- U.K. manufacturing activity maintained its momentum in May and confidence rose as strong domestic demand buoyed orders.

IHS Markit's Purchasing Managers Index was at 56.7 in May after reaching 57.3 the previous month, which was the highest in three years. The reading was better than economists had forecast and keeps the index comfortably above the 50 level dividing expansion from contraction.

Markit said growth is largely being driven by domestic demand, with the export backdrop improving “only in fits and starts” despite the pound's 14 percent drop since the Brexit vote in June 2016.

But it was positive on the outlook for manufacturing, citing “solid” new orders, optimism at a 20-month high and the biggest jump in backlogs of work in six years.

“The sector should have sufficient momentum to see it through the uncertainty generated by the current unexpected general election and into the start of Brexit negotiations later in the quarter,” said Rob Dobson, senior economist at Markit.

Manufacturing only accounts for a small part of the economy, so its performance may not be enough to lift overall growth, which slumped to 0.2 percent in the first quarter. Economists in Bloomberg's survey see a 0.3 percent pace through the rest of 2017.

One pressure point for the U.K. is accelerating inflation, which is hitting households. The factory report showed that while measures of both input costs and output charges eased in May, both remain elevated, with the latter close to a record high.

--With assistance from Mark Evans and Harumi Ichikura

To contact the reporter on this story: Jill Ward in London at jward98@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Andrew Atkinson