Industrial confidence bounces to year highs

Recovery expected to continue – and even manufacturers are upbeat

Having endured the worst downturn since the 1930s, the world's manufacturing companies are at last showing a renewed confidence in the future. Now surveys of managers on the "front line" in the sector in the UK, the US and the eurozone released yesterday all show a marked improvement in sentiment in what has been the hardest pressed part of the global economy.

Such surveys are watched closely by policymakers and investors because they have proved a remarkably reliable leading indicator of actual upturns in output, employment and activity generally in six to nine months' time. In this case, they help to foster the belief that growth, albeit modest, will return to the advanced economies by the end of this year.

The Markit/Chartered Institute of Purchasing and Supply index has breached the 50 mark for the first time since March 2008. A reading of below 50 signifies contraction, one above that number an expansion in output: It is now standing at 50.8. Rob Dobson, Senior Economist at Markit said: "The turnaround has been remarkable. After hitting record lows around the turn of the year, indexes for output and new orders moved firmly into expansion territory in July. The base of the recovery remains broad." However, he added: "Despite the heartening outcome in July, the sector is still reeling from the depth of the recession. It will be some time before manufacturers recover fully from the downturn."

The upbeat nature of the news will help reassure the Bank of England that the huge monetary stimulus they have applied – through record low interest rates and "quantitative easing" (QE) – has begun to produce real results.

Sterling was buoyed by the developments, which came on the back of bumper profit figures from Barclays and HSBC, which also eased concerns that the UK authorities will need to support the banking sector. The pound reached a 10-month high against the dollar.

The Bank's Monetary Policy Committee will announce its latest decision on QE this Thursday. Analysts seem to be leaning towards the view that they will not immediately extend the £125bn programme.

In the US, the ISM confidence index improved for the seventh consecutive month in July, increasing to 48.9 from 44.8 in June, well above the market's expectations for a 46.5 reading and the record low of 37.4 set last November. Again, the figures attracted cautious optimism form observers. Julia Coronado, economist at BNP Paribas said; "We continue to expect modest growth in economic activity in the second half of the year as the record correction in inventories slows and the auto sector reopens after an extended shutdown. That said, we expect growth to be subdued as consumer and business demand are expected to recover more slowly than in previous cycles."

Not to be left out, managers in the eurozone's manufacturing companies are also more cheerful. The manufacturing purchasing managers' survey for July showed the second largest improvement in the survey's history; taking the PMI up to an 11-month high of 46.3 and substantially nearer to that crucial 50 level. However, the outlook for employment still points to a sharp contraction.

The collapse in world trade and the unwillingness of consumers to purchase, on scarce credit, "big ticket" items such as cars and consumer durables has strongly contributed to the manufacturing slump. Economists point out that the sector is no longer dominant in Western economies, having lost its supremacy to the services. But hopes remain that, just as manufacturing led the downturn, it may now lead the recovery.