UK Manufacturing output at seven-year low as uncertainty stifles domestic and export markets

Output volumes fell as intakes of new work contracted at the fastest pace for over seven years, while business optimism dropped to a series-record low.

At 47.4 in August, down from 48.0 in July, the headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to its lowest level since July 2012. The downward movement in the headline index was centred on an accelerated contraction in new work, which decreased to the greatest extent in 85 months. Survey data were collected between 12-27 August.

Steep reductions in new orders were registered across the consumer, intermediate and investment goods industries, contributing to the ongoing downturns in output in all three product categories. Where a decrease in new orders was reported, this was linked to weaker domestic and global economic conditions, low market confidence, Brexit concerns, business uncertainty and a slowdown in client spending.

The level of new export business contracted at the fastest rate in over seven years in August. Ongoing global trade tensions, slower world economic growth and Brexit uncertainty were all mentioned by manufacturers as factors contributing to reduced overseas demand. There were reports that some EU-based clients were routing supply chains away from the UK due to Brexit.

Optimism slumps

Business optimism slumped to its lowest level since a question tracking expectations for future output was added to the survey in July 2012. Lower levels of optimism were linked to weakening market conditions, signs of a global economic slowdown, Brexit uncertainty and subdued client confidence. That said, manufacturers still expect to see some output growth over the coming year, as highlighted by 40% of companies forecasting expansion compared to only 13% anticipating a decline.

Manufacturing employment fell at one of the fastest rates over the past six-and-a-half years in August. Job cuts were driven by cost saving initiatives (including reorganisations and redundancies), slower economic growth and the continued impact of Brexit uncertainty. Stocks of finished goods moved mildly higher, while input inventories edged lower. These trends reflected an interplay between companies reducing safety stocks built around the original Brexit date and those gearing up for a departure at the end of October.

Input price inflation remained solid in August. Of the companies providing a reason for increased purchase prices, over 80% made at least some reference to the exchange rate. Manufacturers passed part of the increase in costs on to clients, leading to a further rise in average selling prices. The strongest rates of increase signalled by both price measures were seen in the intermediate goods sector.

Rob Dobson, Director at IHS Markit, which compiles the survey comments: “High levels of economic and political uncertainty alongside ongoing global trade tensions stifled the performance of UK manufacturers in August. Business conditions deteriorated to the greatest extent in seven years, as companies scaled back production in response to the steepest drop in new order intakes since mid-2012. Based on its historical relationship against officialONS data, the latest PMI Output Index is consistent with a quarterly pace of contraction close to 2%. The outlook also weakened as the multiple headwinds buffeting the sector saw business optimism slump to a series-record low.

“Demand from domestic and export markets both weakened in August, with new export business suffering the sharpest fall in seven years. The global economic slowdown was the main factor weighing on new work received from Europe, the USA and Asia. There was also a further impact from some EU-based clients routing supply chains away from the UK due to Brexit.

“The further downturn in export orders occurred despite a weakening in the sterling exchange at the start of the month. This was felt on the costs front though, with 80% of companies providing a reason for higher purchase prices making at least some reference to the exchange rate. The current high degree of market uncertainty, both at home and abroad, and currency volatility will need to reduce significantly if UK manufacturing is to make any positive strides towards recovery in the coming months.”