UK manufacturing sector growth hits 30-year high in May

• UK manufacturing sector growth soars to the highest level in three decades
• Eurozone Manufacturing PMI hits record high
• Shares in Europe rose in the wake of UK, US and Eurozone manufacturing data
• British pound to euro (GBP/EUR) exchange rate stuck around the EUR 1.16 level

The UK, US and Eurozone published record manufacturing reports on Tuesday, buoying stocks and shares on both sides of the Atlantic this week.

After months of stop-and-start activity and national coronavirus lockdowns, manufacturing data released by IHS Markit has revealed that a release of pent-up consumer demand pushed factory orders to new records in May.

Oil prices soared in the wake of the data, with Brent crude exceeding USD 71 a barrel for the first time in over three months, while the US West Texas Intermediate crude jumped by 2.1% to USD 67.

Although new COVID-19 strains continue to threaten global recovery, the reopening of high-income economies such as the US, UK and Eurozone is fuelling demand for commodities and precious metals.

The global vaccine rollout programmes have also been cited as a reason for increased demand, with approximately a Financial Times tracker showing that approximately 1,938,653,268 COVID vaccines have been administered across 231 countries worldwide.

In the United States, more than 50% of the adult populations are fully vaccinated. Additionally, with much of the economy open for business, US manufacturers have been able to ramp up production to meet booming demand.

Some market analysts expect the US economy to be larger than previously forecasted due to increased consumer spending and US President Joe Biden’s USD 1.9TN stimulus package.

In the Organisation for Economic Co-operation and Development’s (OECD) latest Economic Outlook report, US economic growth was upgraded from 6.5% to 6.9% in 2021.  The OECD also expects the United States to be one of the few nations to suffer limited scarring post-pandemic.

Talks of a multi-trillion-dollar infrastructure programme for the US economy has also fuelled demand for new orders in the country, with the ISM measure of production activity up from 60.7 in April to 61.2 in May.

America isn’t the only country enjoying a growth spurt as continental Europe also posted robust manufacturing reports.

According to IHS Markit, Eurozone Manufacturing PMI soared to new records in May, driven by investment goods producers, which recorded solid gains in both output and new orders.

Euro area manufacturing PMI at 62.8 in May, was relatively unchanged from April’s record high of 62.9.

Although German factory order growth softened from 66.6 in April to 64.4 in May, the reading remains well above 50 – the level that separates contraction from expansion.

Investors were also delighted to find that manufacturing growth in Spain and Italy also saw growth last month, as this supports the view that the bloc is recovering from the coronavirus-induced slump.

However, some economists have warned that growing consumer demand and increased spending runs the risk of higher inflation as it creates supply chain pressure.

Manufacturers will be forced to pass these costs onto consumers, which could cause further implications and cause central banks to raise interest rates, which affects investments by deterring consumer spending.

According to the latest data, German inflation hit 2.4% in May from 1.6% the previous month – the significant increase took inflation levels in the bloc’s largest economy above the European Central Bank’s (ECB) 2% target.

The UK also runs the risk of higher inflation, given that the country is expected to undergo the most robust growth of any other G7 nation in 2021.

UK manufacturing growth surged by 4.7 points in May, up from 60.9 in April to 65.6 last month, as demand for new orders from domestic and foreign buyers grew.

New orders drive UK manufacturing in May

IHS Markit/CIPS’s latest UK manufacturing report has revealed that Britain’s manufacturing sector has grown at the fastest pace in three decades, with coronavirus easing unleashing pent-up demand in the country.

According to a survey published earlier this week, UK manufacturing growth has been driven by a barrage of new factory orders and rising employment.

IHS Director Rob Dobson believes that Britain’s progressive COVID-19 vaccine rollout is also fuelling demand for new orders.

However, the survey further highlighted that demand was outstripping supply, raising concerns about cost inflation, especially as new Brexit rules have already caused supply-chain disruption.

IHS director Rob Dobson notes that as British suppliers struggle to meet growing demand, this is causing delivery delays and supply shortages.

Manufacturing businesses stressed that shortages of electronics, plastics and metals, had increased the costs of supplies and forced them to increase the prices of their goods.

Inflationary pressures are also on the Bank of England’s (BoE) radar, albeit most policymakers are confident that higher prices will be temporary.

Still, material shortages and transport delays are likely to lead to a significant backlog in orders, which will spill over into selling price inflation as suppliers will raise shipping costs and air freight rates to capitalise on demand.

Demand for factory orders is outstripping supply

As the UK economy is rebounding rapidly, manufacturers are likely to feel the impact of supply chain pressures as economies emerge from the coronavirus pandemic.

Despite confidence being high among British manufacturers, KPMG UK Head of Industrial Products Simon Jonsson warned of the dangers of rising demand.

Mr Jonsson added: “Across the Channel, continental Europe’s largest economies, France and Germany are witnessing similar levels of demand for their products and supply chain congestion is now becoming apparent.

“Fingers crossed, we won’t see the same impediments elsewhere, but the squeeze on deliveries will likely cause price rises in Britain.”

Meanwhile, Duncan Brock, the Chartered Institute of Procurement & Supply (CIPS) director, noted that manufacturers are struggling to meet demand now that COVID lockdowns are being lifted.

Mr Brock notes that current price inflation on materials is at levels not seen for decades and anticipates further supply-chain bottlenecks due to forward-buying and building stocks.

The CIPS director stated: “The squeeze on deliveries will translate into more significant inflationary pressures for the wider economy and the country’s place in international trade”.

Still, investors appear to have looked through inflationary concerns as European markets performed strongly in the wake of the manufacturing reports, with mining shares pacing the advance.

Stocks hover near record-highs following encourage manufacturing data

Although financial markets are worried about rising inflation, investors have maintained the risk-on mood in mid-week trade amid a lack of decisive evidence pointing towards growing demand amplifying cost-push pressures.

On Tuesday, Germany’s DAX PERFORMANCE INDEX surged to a high of 15,631.02, and while some economic data has put a dampener on earlier gains, the DAX continues to trade 0.12% higher at 15,585.90.

Meanwhile, the MSCI World Index, which captures the large and mid-cap representation of 23 developed market nations, surged by 2.51 point or 0.35% to a new record high of 713.96 during Tuesday’s trading session.

In US markets, the Dow Jones Industrial Average closed 0.13% higher at 34,575.31, while the tech-heavy Nasdaq Composite Index and the S&P 500 closed in the red. However, with increased optimism over economic recovery improving, these indices could extend their broader uptrend in Wednesday trade.

Investors also appear to be disregarding news that Britain is in the early stages of a third COVID wave due to the growing spread of the Indian variant, formally known as B.1.617.2.

At the time of writing, London’s blue-chip FTSE 100 Index is up by 0.14% or 9.73 points at 7,090.19.

However, as scientists have made calls for the UK government to delay the June 21st unlocking to prevent an “explosive surge” in Indian variant caseloads, downside pressure is mounting on UK stocks.

Professor Ravi Gupta, a professor of clinical microbiology at the Cambridge Institute of Therapeutic Immunology and Infectious Disease, told the BBC that the number of cases of the Indian variant in Britain had grown exponentially.

Although the infection rate in Britain is relatively low, Prof Gupta warned, “all waves start with low numbers of cases that grumble in the background and then become explosive, so the key here is that what we see here is the signs of an early wave.”

The UK government said they would not make a final decision on whether to delay the June 21st coronavirus easing date until they have assessed all the data.

However, the growing collection of voices advising against removing all legal limitations on June 21st will more than likely dampen investor sentiment.

GBP/EUR stuck at the EUR 1.16 level

Pound Sterling (GBP) was the worst-performing currency at the start of the new trading month. Analysts are pinning its lacklustre performance on growing fears about the June 21st final unlocking date being delayed.

The British pound (GBP) has shed gains against a host of major currencies, including the US dollar (USD) and the euro (EUR), with traders weighing up positive economic indicators with news that cases of the Indian variant were rising.

If the end of lockdown is delayed, investors would more than likely interpret the move as a massive blow to the UK’s economic prospects and the broader optimistic narrative surrounding Britain, which has driven GBP higher for the vast majority of 2021.

The British pound to euro (GBP/EUR) exchange rate struggled to reach April highs throughout May and now appears to be stuck around the EUR 1.16 level.

At the time of writing, GBP/EUR is trading 0.2% higher at EUR 1.1607 but could fall back towards EUR 1.15 if concerns over the rapidly spreading Indian variant rattle financial markets.

While the UK currency is trading higher against the euro (EUR), growing confidence in the Eurozone’s economic outlook could significantly boost the single currency over the coming weeks.

Currently, GBP is favoured due to the difference in vaccination campaigns between Britain and Europe, as the UK is closer to “economic normalisation than other economies,” says Toshiya Yamauchi, chief manager of the foreign exchange margin trading at Ueda Harlow Ltd.

However, with the coronavirus vaccine rollout in the bloc gathering pace and economic data releases out of the bloc proving to be increasingly positive, EUR/GBP could head higher in foreign exchange (FX) markets.

Thursday will also see a statement from ECB President Christine Lagarde. If she delivers a relatively hawkish outlook of the Eurozone economy, this could ramp up demand for the euro (EUR).

Pound Sterling (GBP) will continue to be driven by coronavirus developments, Britain’s vaccine rollout and news about whether the UK’s final round of COVID-19 lockdown easing will be delayed.