• Index posts its highest reading since October
• ‘We aren’t out of the woods yet’ says CIPS director

The rate of decline in the UK’s manufacturing sector eased by more than expected in March as orders and output fell less sharply.

The Chartered Institute of Purchasing and Supply’s manufacturing purchasing managers’ index jumped to 39.1, from 34.7 in February, the highest since October.

Roy Ayliffe, director at the Chartered Institute of Purchasing & Supply (CIPS), said: “UK manufacturers voiced a sigh of relief as March PMI data posted its highest reading since last October.

“However, with purchasing managers still concerned over falling levels of production and weak demand, it’s clear we aren’t out of the woods yet. If anything, latest data serves to highlight how badly the sector fared around the turn of the year,” he said.

Sterling extended early gains against the dollar and euro on the back of the data. The euro extended early losses to 91.54p, while the pound hit a session high of $1.4408.

Jonathan Loynes, chief European economist at Capital Economics, said: “The unexpected rise in the CIPS manufacturing report in March is a welcome surprise, but does not transform the picture of very weak conditions in the industrial sector.

“The PMI composite balance of 39.1 (up from February’s 34.7) is the highest reading since last October. However, at this level, the index is still consistent with annual falls in output of around 10%. What’s more, the average index reading in Q1 of 36.5 was still a bit lower than that seen in Q4 last year, suggesting that industrial production will make another large negative contribution to overall GDP growth in Q1. Admittedly, provided that the index remains at this level, things should start to look better from Q2 onwards. So there is some support here for the idea that the industrial downturn has been exacerbated over the last quarter or two by a rundown in inventories. But it would be premature to conclude from this survey that the industrial sector is on the road to recovery.”

Meanwhile, the Office for National Statistics said that the net rate of return by private non-financial corporations in the fourth quarter of 2008 was 12.8%, compared with the revised estimate of 13.7% in the previous quarter.

Roger Bootle, economic adviser to Deloitte, said: “At the end of last year, profitability (outside the oil sector) was still holding up reasonably well. This looks extremely unlikely to last. With GDP this year likely to suffer its sharpest fall since 1945, I think that profits will fall by a whopping 25% in 2009 as a whole.”