Positive indicators for the British economy: The manufacturing sector breaks the deflation barrier
In a glimmer of hope for the UK economy, the manufacturing sector returned to growth in March 2024 for the first time in nearly two years, raising hopes that the economy may be emerging from its recent recession. According to the final data from the Standard & Poor's Global/CIPS Purchasing Managers' Index (PMI), the index registered 50.3 points, up from 47.5 points in February. This is the first reading above the pivotal 50-point mark since July 2022; a reading above 50 indicates expansion, while a reading below 50 indicates contraction.
Context of previous economic challenges
This positive turnaround comes after a long and difficult period during which the UK manufacturing sector suffered a sustained 20-month contraction. The sector was significantly impacted by a series of complex challenges, most notably high inflation, which drove up raw material and energy costs, and the Bank of England's interest rate hikes to curb inflation, which increased borrowing costs for businesses. Disruptions to global supply chains, exacerbated by the fallout from Brexit and global geopolitical tensions, also played a pivotal role in weakening the sector's performance. These factors combined led to a decline in both domestic and foreign demand, forcing many factories to reduce production and postpone investment plans.
The importance of growth and its expected impact
This growth is significant on several levels. Domestically, it is seen as strong evidence that the UK economy may have weathered the worst and begun its recovery from the technical recession it entered in the second half of 2023. This improvement is expected to boost business and investor confidence, potentially encouraging increased investment and job creation. It may also ease the pressure on the Bank of England to initiate a monetary easing cycle and cut interest rates in the coming months to support economic growth.
At the regional and international levels, the recovery of the UK manufacturing sector reinforces the UK’s position as a key trading partner. Reports indicate that growth was partly driven by an increase in new orders from key export markets such as the US and Europe, suggesting a relative stabilization of trade relations after a period of turbulence. This performance underscores the sector’s ability to adapt and compete in a changing global economic environment, which is vital to the success of the post-Brexit “Global Britain” strategy.
