The UK manufacturing sector ended 2012 with its fastest growth rate for 20 months and the Purchasing Managers’ Index (PMI) hitting a 15-month high of 51.4. According to the monthly survey conducted by the Chartered Institute for Purchasing & Supply (CIPS) and Markit, the sector’s higher output reflected improved demand from the domestic market, while new export orders fell again as they had every month during 2012.

Manufacturing employment in the UK declined for the eighth month in a row, while there was a further decrease in work backlogs, indicating that there is spare capacity in the manufacturing sector.

According to Markit’s senior economist Rob Dobson, the December PMI signalled a “reassuringly solid return to growth for the sector. However, this does little to change the view that the sector contracted over the fourth quarter as a whole, following the temporary growth surge of 0.7% in the third quarter.”

Although there are signs that UK firms are starting to move out of a cost-cutting mode, “the outlook remains far from certain," Dobson adds. “Business confidence among producers therefore remains fragile and could easily be derailed by setbacks in key export markets, notably any resurgence of the Eurozone debt crisis.”

Commenting on the PMI data, Lee Hopley, chief economist at the manufacturers’ organisation, EEF, said: “UK manufacturers bring in the New Year with news of a stronger-than-expected finish to 2012. The rise in output and orders at the end of last year is a positive signal that the sector can continue to recover in the year ahead, but the strength of that recovery will, as ever, depend on what happens in other parts of the world.

“2013 is likely to remain challenging and exporters, in particular, will be hoping to see stability in the Euro-zone, and signs that demand will continue to hold up in the US and emerging economies in the coming months,” Hopley adds.