Manufacturing grows at weakest rate in 16 months, putting rate hike in doubt

Output from Britain's manufacturing sector grew at its weakest rate in nearly a year and a half, with the soft patch now raising questions over whether the Bank of England will hike interest rates this week.

The Markit/CIPS UK Manufacturing purchasing managers' index (PMI) showed a reading of 54.0 last month, lower than the 54.3 for June.

It was the lowest level for manufacturing PMI in three months and marked the weakest expansion rate in 16 months.

While a reading above 50 still indicates growth, economists were expecting a figure of 54.2.

The sector was hit by a slowdown in domestic demand, which offset stronger export orders from the likes of mainland Europe, the US, China and the Middle East.

The strongest growth in both production and new orders was seen among investment goods producers, while consumer goods manufacturing also "fared relatively well".

However, intermediate goods production contracted for the first time in two years.

Rob Dobson, a director at IHS Markit, which compiles the survey, said: "UK manufacturing started the third quarter on a softer footing, with rates of expansion in output and new orders losing steam.

"The upturn in the sector has eased noticeably since the back-end of 2017, meaning that manufacturing has failed to provide any meaningful boost to headline GDP growth through the year-so-far."

He said it raised questions about the likelihood of a widely-anticipated interest rate hike by the Bank of England on Thursday.

"If the combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored in the larger service sector, the Bank of England's decision will be far from unanimous and they may even yet find some cause for pause."

Lee Hopley, the chief economist of the manufacturers' organisation EEF, said there was no doubt that "the best of the upturn is behind us" and that a number of risks - including global trade disruptions and uncertainty over Brexit - have become more prominent over recent months.

The PMI report showed that confidence among manufacturers fell to a 21-month low, with Brexit uncertainty and the exchange rate playing a part.

Around 48% of firms still expect output to be higher in one year's time, compared to just 8% that are forecasting a contraction.

But Ms Hopley believes a rate hike is still on the cards.

"This is it in terms of data ahead of the MPC's decision tomorrow. With on-going indications of expansion, some support from overseas demand and continued signs of price pressures this shouldn't dissuade those voting for a rate rise."

The report said input costs "remained elevated" in July, with higher commodity prices and raw material shortages pushing up prices - some of which were passed on to clients.

It resulted in the steepest rise in selling prices since February.

Employment across the manufacturing sector rose for the 24th month in a row, held up by firms involved in all of consumer, intermediate and investment goods.

Companies said higher staffing levels were linked to expansion plans, higher output and efforts to reduce work backlogs.