Britain's manufacturing sector surprisingly returned to growth in January, as companies cranked up production driven by new orders, stirring hopes the country will skirt recession.



There is a very decent chance that the manufacturing sector will return to growth in the first quarter of 2012... However, whether or not the UK can avoid further contraction in the first quarter will depend mainly on what happens to services output and consumer spending.

Manufacturers still face very challenging domestic and international conditions, so it remains to be seen whether they can build on their improved start to 2012.

There was some good news on the inflation front, with input prices falling for a third month running and output prices rises at the slowest rate for 27 months. This supports belief that consumer price inflation is headed down substantially further over the coming months and facilitates further Bank of England quantitative easing in February.


In the context that we expect a better number from services on Friday...the service sector has been doing better, it's a large component of the economy, together these two numbers will go a little way to quelling the idea that a technical recession, i.e. Q4-Q1, is a dead cert.

A good start to Q1 if it indeed continues. It's early days yet. Encouraging that the new orders index was up strongly as well.

I don't think a slight blip back into expansionary territory in the manufacturing PMI is going to have any bearing on the Bank of England at all next week. And we still expect them, like the rest of the market, to announce a further increase of quantitative easing by between 50 to 75 billion pounds.


The figures are a big surprise to the upside. It's true that the PMIs from the euro area have also shown a similar trend. Whether the latest reading reflects an accurate state of the manufacturing sector, or the volatility of the data, remains to be seen.

A number of things have happened over the winters of the past few years that suggest that economic data - not just (PMI) surveys - may have to be treated with caution.

This 5.6 point surge in the (PMI) output index may be genuine, but it runs against the grain of most anecdotal evidence.

I imagine that the MPC will be looking at these figures carefully. But the bigger picture is that the BoE's inflation forecasts are so low that it would take a major change of view for the committee to reject a change in policy this time.

So even if the committee places a significant degree of weight on the survey, we will get more QE next week.


We believe that the UK will avoid recession and post some positive, if moderate, growth in Q1. Today's number supports our view. It's clearly early days, but the outlook for the economy has distinctly improved over the last few months.

While we don't expect that to be sufficient for the MPC to question the wisdom of more QE in February, if it continues it will draw into focus the possibility that a further extension beyond that will start to look less likely.


We thought we'd see a gain because the trends in the euro zone and U.S. equivalents suggested some upside, but we didn't think it would be as big as this.

Historically, the surveys have tended to provide a better indication than the official data. It gives me some encouragement, but I don't think this is necessarily telling us the economy is embarking on a full-scale recovery. But in terms of the debate over whether we're sinking back into recession, these numbers go against that and cast doubt on some of the numbers the ONS is publishing at the moment.

I don't think this fundamentally changes the BoE's decision on QE. They have acknowledged and detected an improvement in the forward-looking numbers. But ultimately, the QE decision is based primarily on the inflation projections. I still think that given the starting point of the November forecast, we would still expect the February projections to show a significant undershoot. Given the combination of weak official data now and falling inflation, that gives them a window in which it is quite easy for them to announce more QE. But it's by no means a done deal. There's significant uncertainty about the quantity and the rate at which they make the purchases.


The UK manufacturing PMI has come in strong, offering some encouragement that the likely recession may not be as deep as some analysts fear.

Importantly, new orders rose to their highest level since March last year, which bodes well for production data in the next couple of months.

The report also states that there has been an increase in the willingness of businesses to spend, thereby potentially offering hope for investment and hiring.

Nonetheless, with consumer spending still accounting for nearly two thirds of UK GDP, we still predict a negative quarter of growth in 1Q12, which would confirm a technical recession.

(Reporting by London bureau)