UK factory output recorded the strongest growth in more than two years! Cost pressure has resumed, and the Bank of England's interest rate hike path this week has been strengthened

The Zhitong Finance App learned that the UK's October manufacturing PMI survey report released a relatively important signal for the stock and bond exchange market — UK orders and production are recovering at an accelerated pace, but rising investment costs and stagnating recruitment mean that the improvement in demand has not been smoothly transformed into corporate profits and employment growth. Against the backdrop of rising inflation in the UK and the Eurozone, and the Fed still reserving room for further interest rate hikes, the market needs to simultaneously measure two forces — economic resilience's support for corporate income, and the restraint of costs and interest rates on profits, cash flow, and valuation.

The UK manufacturing industry entered the fourth quarter with stronger growth momentum. The manufacturing purchasing managers' index (PMI) rose from 51.9 in September to 52.8 in October, a five-month high, in line with the initial value; the UK manufacturing output segment rose from 51.5 to 53.6, reaching the highest level since September 2024. Compared with the PMI Composite Index, the output segment directly reflects changes in production activity during the month. Its increase of 2.1 percentage points is sufficient to indicate that the company's production expansion has accelerated markedly.

Orders pick up, but recruitment stalls: UK manufacturing recovery is being tested by costs

The demand side also provided support for this accelerated improvement in manufacturing PMI: the growth of new orders reached the fastest rate since July, domestic demand in the UK improved at the same time as overseas demand, and the sources of new orders included mainland China, the European Union, and the United States. The company's expectations for future output also showed the biggest improvement since November 2025.

According to official data, in the 12 months to August, UK manufacturing output grew by 3.0%, the fastest since March 2024. Surveys and actual output data echo each other, enhancing the credibility of the recovery in the manufacturing industry.

However, the business situation is clearly divided: the increase in investment costs in October reached the highest rate since June, and is also one of the fastest levels since the sharp rise in UK inflation in 2022; employment growth in the manufacturing industry stagnated after six months of continuous expansion, and small and medium-sized manufacturers were particularly squeezed by rising labor costs and raw material prices. This means that although companies can receive more orders, they are not necessarily willing to increase fixed labor costs at the same time. Looking at the management mechanism, prioritizing the use of existing personnel and production capacity to complete orders can support short-term output, but if costs continue to rise, companies will eventually need to choose between increasing sales prices, reducing profits, and slowing down expansion.

Official producer price data further confirms this pressure: manufacturing input prices rose 8.3% year on year in September, up from 6.7% in August; ex-factory prices rose 4.6% year on year, up from 3.8% previously, the biggest increase since April 2023. The two indicators show that cost shocks have been transmitted along the production chain to sales prices, and whether corporate profits can be improved depends on product pricing capacity, production efficiency, and cost transfer speed.

The PMI survey was conducted from October 12 to 27, before Chancellor of the Exchequer John Healy announced the first budget, so the improvement in manufacturing sentiment cannot be attributed to budget measures. The budget basically avoided general tax increases for enterprises, but announced a 3.9% increase in the minimum wage next year. The subsequent impact will be reflected more in the employment arrangements, profit margins, and sales price adjustments of labor-intensive enterprises.

Inflation is under renewed pressure: the UK interest rate hike window is approaching, and the US and Europe are still lagging behind in the suspension

The pressure faced by the Bank of England has extended from manufacturing costs to consumer prices. The UK CPI rose 3.5% year on year in September, up from 3.1% in August; core CPI rose from 2.6% to 2.8%, and service inflation rose from 3.4% to 3.7%. Motor vehicle fuel is the main driver of overall inflation acceleration, but core and service prices are heating up at the same time, making it more difficult for central banks to view the full pressure as a brief energy disturbance.

According to an economist survey released by Reuters on November 2 and the Bank of England's monetary policy outlook, economists expect the Bank of England to raise interest rates by 25 basis points on November 5, raising the policy interest rate from 3.75% to 4%. This will be the first rate hike since August 2023. However, the next path is clearly divided: the financial market is betting on raising interest rates three to four more times in 2027, 25 basis points each time, to push interest rates to 4.75% — 5%; the economists interviewed did not agree on whether to continue to raise interest rates after November. As a result, the Bank of England may act this week while curbing excessive market bets on continuous interest rate hikes.

The recovery in the UK's manufacturing industry has strengthened the real basis for interest rate hikes: demand is still resilient, and companies are more likely to try to pass on costs to customers. But the stagnation in recruitment also shows that companies' affordability is not borderless. What monetary policy should prevent is that increases in energy and raw material prices gradually solidify into a continuous rise in wages, service prices, and inflation expectations; if high costs have clearly curtailed recruitment and consumption, the cost of continued austerity will also increase.

The latest statistics show that the Eurozone faces similar constraints. As of November 2, the latest released September data showed that overall inflation rose from 3.2% to 3.8%, energy inflation rose from 14.3% to 18.9%; core inflation rose slightly from 2.4% to 2.5%, and service inflation rose from 3.0% to 3.2%. This structure shows that energy is still the main driving force, and changes in widespread price pressure are relatively moderate.

The ECB kept the deposit interest rate unchanged at 2.50% on October 29, stressing that energy shocks may drive up inflation and weaken growth, while acknowledging that the tightening of financial conditions has had an inhibitory effect on the economy. On November 2, Management Commissioner Kazimir further stated that the market may underestimate the level of austerity that still needs to be taken; interest rate futures market traders currently expect the ECB to raise interest rates two to three times in the next year. This reflects the risk of further rate hikes, but it is not yet the ECB's collective commitment to a specific path.

The Federal Reserve is also in the process of observing and continuing to fight inflation. On October 28, the federal funds rate target range remained between 3.75% and 4.00%. Two members advocated a 25 basis point rate hike; later announced that the US PCE inflation for September was 3.6% year-on-year, and the core PCE was 3.1%, all significantly higher than the 2% target. Walsh emphasized preventing the spread of rising energy prices, while pointing out that improved productivity meant that faster growth would not automatically cause the economy to overheat, and he did not promise policy action in December. By October 30, the market's bets on the December rate hike had declined somewhat, but interest rate hikes were still supported by market expectations compared to maintaining interest rates unchanged.

The common problems of the three central banks are therefore very clear — the demand side has not stalled significantly, yet inflation has not stabilized back to target; at the same time, businesses and households have begun to bear higher financing costs. The UK may take action this week, while the Federal Reserve and the European Central Bank will continue to observe the data. Differences in policy pace will be an important driving force for exchange rates and yield curves.