Manufacturing activity expanded at its fastest pace in 10 months in March, driven by a pick-up in new orders and increasing the chance that economy grew in the first three months of 2012 and avoided a recession.
Together with signs that a surge in firms' costs could fuel inflationary pressures, the improvement in the sector is adding to views that the Bank of England may shy away from another cash injection to boost the fledgling recovery.
The Markit/CIPS Manufacturing Purchasing Managers' Index (PMI) rose to 52.1 in March from an upwardly revised 51.5 in February, confounding analysts' forecasts for a drop to 50.7 and hitting the highest level since May 2011.
The index has been above the 50 level that separates expansion from contraction since December.
The survey indicated manufacturing output growth of 0.3 percent in the first quarter of 2012 after its 0.7 percent decline contributed to the overall contraction of the economy in the final quarter of 2011, Markit economist Rob Dobson said.
This is obviously nowhere near a strong pace, but it is at least sufficient to prevent the sector from remaining a drag on broader GDP growth, he said.
Inflows of domestic and export orders also showed some improvement in March, but exporters are having to tap markets further afield as conditions in the euro zone remain lethargic, he added.
The figures will reinforce expectations that the Bank will hold off injecting more stimulus into the economy once its 325 billion pound quantitative easing programme is complete in May, especially if an equivalent survey of the services sector, due on Wednesday, also shows a pick-up.
All 63 economists in a Reuters poll expect the Bank to leave rates at a record low 0.5 percent at its monthly policy meeting this week and keep its asset purchase target unchanged.
Data showing that firms raised their prices in response to higher raw materials costs is likely to dismay some of the more hawkish MPC members, who are concerned that inflation will not fall as quickly as they had hoped due to a rise in oil prices.
The PMI input prices index was its highest since last August, with manufacturers reporting higher prices for electronic components, metals, oil, plastics and transport.
Markit said that the pick-up in firms' cost pressures since the start of this year was one of the steepest in the survey's 20-year history. Moreover, firms passed on some of the higher costs, driving up the output prices index to a six-month high.
The survey also showed that manufacturers ramped up output in response to rising demand from home and abroad.
The new orders index jumped to 52.7 in March from 50.5 in February to stand at its highest in a year, while the export orders index rose to a three-month high, reflecting new business from Africa, southeast Asia and Japan. That was tempered by some firms reporting a decline in business from Europe.
Manufacturers' stockpiles rose at the fastest pace in the survey's history, with the steepest gains booked in consumer goods as some firms were rebuilding inventories and others were hopeful that consumers would spend more this year, Markit's Dobson said.
Manufacturers kept employment levels steady overall after reporting moderate staffing increases in February, with the employment index falling by more than a point in March.
(Editing by Susan Fenton)