Strength of new orders suggests that the recovery will have legs – ITEM Club comments on today’s PMI manufacturing figures

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Andrew Goodwin, senior economic advisor to the EY ITEM Club, comments on today’s PMI manufacturing figures:

  • Encouraging results support the notion of a return to growth in Q1
  • Strength of new orders suggests that the recovery will have legs
  • Sharp rise in costs presents an increasingly important risk, particularly if it leaks into consumer prices

“Another encouraging set of results, which makes it almost certain that the economy will have returned to growth in the first quarter. Official data for the manufacturing sector was already pointing to a reasonably good Q1 and today’s figures provide further evidence that this will be the case. Based upon the official data available so far and recent business surveys, we expect manufacturing output to have grown by 0.8% on the quarter. It looks as if GDP will have grown by around 0.3% in Q1, fully reversing the 2011Q4 decline.
“On the whole the detail of the survey is reasonably encouraging. Sustained growth in new orders suggests that the recent upswing will have some legs, although output growth may slow somewhat in the coming months due to the recent build-up in stocks.
“The only fly in the ointment is on the costs and prices side. At the moment the rise in raw materials costs is being reflected in a squeeze on margins. However, the longer that input prices continue to rise, the greater the chance that it will feed through to consumer prices. This in turn would reinforce the pressure on household finances and place a significant question mark over the prospects for a sustained recovery this year.”