British manufacturing activity grew last month for the first time since March 2008, benefiting unexpectedly from the fastest flow of new orders since November 2007, purchasing managers' data showed on Monday.
The headline manufacturing purchasing managers' index rose to 50.8 from an upwardly revised 47.4 in June, the first time the number from the Chartered Institute of Purchasing and Supply and Markit Economics has been above the 50 level that divides contraction from growth since March last year.
This was well above economists' expectations of a rise to 47.7 and marks a sharp rebound from the record low of 34.9 set in November, adding to evidence that Britain's economy is over the worst of the recession.
"The turnaround signalled by PMI data during 2009-to-date has been remarkable," said Rob Dobson, senior economist at survey compilers Markit Economics. "The base of the recovery remains broad, which should help with sustaining gains into Q4."
Sterling rose to a nine-month high versus the U.S. dollar and a one-month high versus the euro after the data, and September gilt futures extended losses to their day's low.
"This (data) suggests that the UK economy is likely to record positive growth through the rest of this year and into the next. However, ongoing deleveraging and rising unemployment still suggest that the recovery will be fragile," said James Knightley, UK economist at Dutch bank ING.
On the positive side, the new orders component of the headline PMI number jumped to 55.9 from June's 49.8, its highest level since November 2007 and the first time orders have risen since March last year.
"Panellists reported that market conditions and client confidence were stabilising, especially in the domestic economy. Successful promotional activity and price discounting also supported sales volumes in July," Markit said.
But there was bad news for jobs. Employment was still contracting rapidly, albeit at the slowest pace since June 2008, with reports of redundancies, hiring freezes and the non-replacement of factory workers who quit.
Spirits company Diageo reported 500 job losses last month, and steelmaker Corus announced 1,922 workers would lose their jobs late in June.
"The sector is still reeling from the depth of the recession. Restructuring and cost control efforts remain widespread, job losses are still mounting and inventory positions being unwound at an historically rapid pace," Dobson said.
Manufacturing output rose for a second consecutive month in July, and at its fastest pace since December 2007 — markedly more positive than economists' expectations that official manufacturing data would show a 0.1 percent fall in output in July after a 0.5 percent drop in June.
Economists said the discrepancy with official data meant that the PMI data needed to be treated with care.
"We need to be cautious about reading too much into the PMIs of course because we have seen a fairly marked pick-up in the PMIs over recent months and yet the Q2 GDP out-turn was quite a bit weaker than expected," said Adam Chester, economist at HBOS.
"The key question is: 'To what extent does this improvement reflect the moderation in inventory liquidation that we have seen over the last three to four months, (and) to what extent this improvement is sustainable?'," he added.
Companies reported restarting production they had stalled during the depths of the recession earlier in the year, with large firms expanding output faster than smaller ones.
Nonetheless, firms said stocks remained relatively high compared to current demand, and that some were selling inventory to boost cash flow.
* Detailed PMI data are only available under licence from Markit and customers need to apply to Markit for a licence.
