The manufacturing PMI was stronger than expected in January and consistent with positive sentiment among manufacturers for the first time in four months. The headline index rose by 2.4 points to 52.1 (BarCap: 51.0, consensus: 50.0), its highest since May last year.

The output sub-index saw the largest increase, by 5.6 points to 55.8, reaching its highest reading for 10 months (see chart). The new orders sub-index increased to 52.2 (from 49.7) and was consistent with expanding new orders for the first time in eight months. The improvement in the new orders measure was mainly a result of increased domestic demand, while the export orders sub-index fell to 50.9 (from 53.4). The recent fall in the export orders measure brings it more in line with the economic weakness in the euro area over recent months.
 
The survey indicated that manufacturing employment grew marginally in January. The employment sub-index rose to 50.1 (from 49.6), as small businesses increased payroll numbers while marginal job losses were seen at larger companies. Nevertheless, the uncertain economic outlook and the need for cost reduction continue to cast a shadow over hiring plans.
 
Price pressures eased further in January. The index for input prices fell by 1.9 points to 45.1, suggesting falling input prices for the third consecutive month after a period of 27 months of uninterrupted input costs increases. The output prices index also continued on a downward trend, falling to 50.4 (from 50.8). Respondents indicated that falling input costs and strong competition led to subdued price pressures.
 
The manufacturing PMI and other survey measures have recently indicated this could be the start of a measured recovery in manufacturing, after the sector experienced a rapid deterioration last year. Nevertheless, manufacturing activity still has some way to go before it reaches the pace of growth seen this time last year. Much will depend on whether the recent pick-up in overall new orders will be sustained and the slowing in export new orders does not bode well in this respect. Nevertheless, this is a good start to Q1 12 and, if the pace of improvement is sustained, it would imply some upside risks to our forecast for a small quarterly fall in manufacturing output in Q1.
 


source: BarCap