Manufacturing growth and costs rise

Better-than-expected growth in the manufacturing sector in March has been overshadowed by one of the steepest rises in input prices for 20 years.

The Markit/CIPS survey, where a reading above 50 represents growth, hit a 10-month high of 52.1, which was higher than February's score and exceeded City expectations of 50.8, although the growth was partly driven by companies building up levels of inventories at record rates.

While the survey indicates that the sector returned to growth in the first quarter of 2012, it also showed that average prices rose at their fastest rate since last August in "a marked turnaround" from the sharp declines just two months ago.

The extent of the pick-up in costs since the start of 2012, driven by rising oil and metal prices, is among the steepest in the survey's 20-year history and is already starting to pass its way through to customers, with selling prices up at their fastest pace for half a year.

Rob Dobson, senior economist at Markit, said: "A major cause of concern among manufacturers is the recent upsurge in input prices, which mainly reflects high oil prices."

He added that strong competition meant firms were struggling to pass on the full extent of the cost hikes but warned "margins can only be squeezed so much until producers need to raise prices".

The stronger than expected performance - the fourth month of growth in a row - will help ease fears the UK economy is slipping back into recession after a bigger than previously thought 0.3% decline in gross domestic product - a broad measure of output - in the final quarter of 2011.

Economists at Markit think that the sector has grown by about 0.3% in the first quarter of 2012. Domestic demand increased in March and companies saw growth in Africa, Asia and Japan, which helped offset weakness caused by the eurozone debt crisis.

Despite the growth in new orders, the survey said conditions in the sector remained "tough overall". The sector's growth was partly driven by manufacturers "burning through backlogs of orders" and building up stockpiles of finished products at record levels, particularly for consumer goods products.

CIPS chief executive David Noble said the rise in inventories could signify that demand is expected to pick up in the coming months. But Samuel Tombs, an analyst at Capital Economics, said: "Given that a pick-up in price pressures appeared to contribute to the manufacturing slowdown in the second half of last year, it seems as if the industrial recovery is still built on shaky foundations."