* UK manufacturing PMI hits highest since June 2014
* New export orders boosted by sterling's post-Brexit vote
* But inflation pressures continue to rise
* Analysts cautious about long-term health of UK economy
By Andy Bruce
LONDON, Jan 3 British manufacturing grew at its
fastest pace in two and a half years high last month, adding to
signs that the economy ended 2016 strongly despite the shock of
June's Brexit vote, a survey showed on Tuesday.
The Markit/CIPS UK Manufacturing Purchasing Managers Index
(PMI) rose to 56.1, the strongest reading since June 2014, from
53.6 in November, helped by orders from home and abroad.
That exceeded all forecasts in a Reuters poll of economists
which pointed to a slowdown to 53.1, and boosted sterling to a
two week high against the euro.
Britain's economy has fared much better than many economists
predicted since the vote to leave the European Union, with
consumer spending strong and companies performing well.
But the manufacturing PMI showed rising cost pressures on
factories, something that is likely to feed increasingly into
Survey compiler IHS Markit said the manufacturing output
appeared to be rising at a strong quarterly pace of around 1.5
percent, with orders boosted by sterling's plunge after the
IHS Markit's euro zone PMIs showed manufacturing growth
there hit a more than five-year high, similarly boosted by an
influx of new orders.
But analysts were wary about the outlook for 2017 and said
official data for British manufacturing has been weaker than the
PMI surveys have suggested.
"UK manufacturing is benefiting from both continued brisk
growth in domestic demand as well as improving global demand,
but this momentum likely will peter out in 2017," said Samuel
Tombs, economist at Pantheon Macroeconomics.
Rob Dobson, senior economist at IHS Markit, said higher
factory costs were the downside of the pound's fall which left
it down around 10 percent on a trade-weighted basis since June.
"Of the companies citing a cause of higher costs, 75 percent
linked the increase to the exchange rate," Dobson said.
Trade credit insurer Euler Hermes warned manufacturers were
nervous about rising input costs that were putting pressure on
companies' cash flow.
The Bank of England is also watching inflation pressures
closely. Although it is willing to tolerate some overshoot of
its 2 percent inflation target while the pound's fall since last
year feeds through into prices, it has warned there are limits.
Britain's economy looks on track to expand by more than 2
percent in 2016 - faster than almost all other big advanced
economies except perhaps the United States.
Economists polled by Reuters expect Britain's growth rate to
more than halve in 2017 to 1.1 percent.
(Editing by Larry King and Alison Williams)