Commenting on the latest CIPS UK Manufacturing Purchasing Managers’ Index, which has increased to 53.7 in April, from 51.0 in March, Mike Thornton, Head of Industrials at RSM UK, said:

“Strong headline manufacturing PMI figures, jumping to 53.7 in April, shows surprising resilience again despite the middle east crisis. There are also clear signs of positivity in terms of employment with the index tipping above 50 for the first time since significant employment cost increases were announced in the Autumn Budget 2024. Notwithstanding the geopolitical situation, it’s reassuring to see that order intake, both domestic and export, has held firm.

“On the flip side, the input price index has surged upwards. This squeeze will be hitting the margins of manufacturers over the coming months and working capital requirements will increase. The output price increase has increased already, perhaps indicating that manufacturers are now more agile when it comes to passing the increased cost burden onto customers.

“Middle market manufacturers are likely to be more exposed to volatility in energy costs than larger firms, which are typically better hedged. This difference could accelerate consolidation across the sector as sustained input cost pressure squeezes the wider supply chain - giving bigger manufacturers a competitive advantage.

He added: “If the conflict in the Middle East continues, we are likely to see energy costs weigh heavily on industry. Accelerating the introduction of the British Industrial Competitiveness Scheme (BICS) is a step government could take now to reduce electricity costs when industry needs it most.”

Thomas Pugh, Chief Economist at RSM UK, said: “The rebound in the output balance of the Manufacturing PMI suggests that production held up in April despite the war in Iran. Admittedly, much of that resilience is due to activity being brought forward ahead of price rises and potential supply shortages. This means growth is expected to slow sharply in Q2, even if April is stronger than expected, as higher energy prices start to eat into real incomes and margins.

“At the margin, surging input and output price balances alongside rising output suggests that the MPC may have more room to raise rates than initially thought, especially as the employment balance turned positive for the first time since October 2024. However, as front-running fades we expect output to drop sharply. Indeed, the future output index dropped to its lowest level in a year suggesting that recent momentum won’t last much longer.

“Ultimately, everything depends on how energy prices move going forward. If demand holds up, then second round effects are more likely and shift the MPC’s focus towards returning inflation to target. In any case, the longer the crisis continues the more likely it is that demand will weaken. This leaves the economy in another bout of stagflation which the Bank will probably balance by staying on hold this year, but the risks are clearly skewed towards rate hikes.”

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