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Purchasing Manager's Index falls to lowest level in three years

01 August 2012

At 45.4 in July, down from a revised reading of 48.4 in June, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index fell to its lowest level since May 2009, signalling a steeper decline in UK manufacturing.

David Noble

The downturn in the UK manufacturing sector gathered pace at the start of Q3 2012. At 45.4 in July, down from a revised reading of 48.4 in June, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index fell to its lowest level since May 2009. Operating conditions have deteriorated in each of the past three months.

Output and new orders both contracted sharply during July, as companies faced weaker demand from domestic and export clients. The decline in production was the steepest for 40 months, with contractions recorded in both the intermediate and investment goods sectors. In contrast, output rose slightly at consumer goods producers. 

The level of new export business declined for the fourth month running and at the fastest pace since February 2009. The ongoing weakness of the Eurozone market remained the principal drag on new export orders, although there were also some reports of a decline in new business received from Asia.

Average input prices declined for the second straight month, with the rate of deflation only marginally slower than  June’s three-year peak. Lower purchasing costs were linked to reduced chemical, commodity, oil, metal, paper and plastic prices. Exchange rate factors were also reported to have lowered the cost of certain imported goods. 

In contrast, average selling charges rose further in July. Manufacturers continued to pass on the higher raw material prices incurred earlier in the year, while a number also moved to protect (or recover) their operating margins. Manufacturing employment rose slightly for the first time in three months during July. Companies indicated that staffing levels had risen to complete outstanding contracts and as part of planned company expansions. However, the rate of increase was only marginal.

July saw backlogs of work decline at the sharpest pace since March 2009, with almost a third of survey respondents reporting a decrease. Outstanding business has now fallen throughout the past one-and-a-half years. The weaker performance of the sector, and rising levels of cost caution, led manufacturers to implement a steep cutback in purchasing and reduce their inventory holdings.

Input buying volumes contracted at the secondsteepest pace in three years in July, a major factor underlying a sharp reduction in pre-production stocks. Finished goods inventories fell to the greatest degree in 33 months. Lower demand for inputs eased the pressure on supplier capacity, leading to a marked shortening of average lead times.

Comment:
Rob Dobson, senior economist at Markit and author of the Markit/CIPS Manufacturing PMI said: “The UK manufacturing sector hit turbulent waters in July. Companies scaled back output to the greatest extent since March 2009, as underlying demand remained weak and market conditions highly competitive. Coming on the back of a 1.4% decline in manufacturing production in the second quarter, it looks like the sector remains a major drag on the overall economy.

“The July PMI survey suggests that the domestic market shows no real signs of renewed life, while hopes of exports charting the course to calmer currents were hitby our main trading partner, the Eurozone, still being embroiled in its long-running political and debt crises. Brighter news may have been offered by a slight gain in employment and a further easing in input prices, but these will provide only short-term benefit if market conditions fail to improve substantially. 

“The announcement of additional quantitative easing and launch of the Funding for Lending scheme are too recent to have had an effect. We wait to see whether these will provide the desired and hoped for support to industry later in the year.”  

David Noble (pictured), chief executive officer at the Chartered Institute of Purchasing & Supply said: “A perfect storm of wet weather and weak confidence in the UK has combined with global economic drift to engulf the manufacturing sector in July. While the Eurozone has continued to be the major factor, declines in business from Asia have dashed hopes of a quicker recovery.
   
“Manufacturers are doing everything they can to arrest the decline, working through backlogs, cutting back on purchasing, and passing on costs, but there is little room to manoeuvre. 

“A slight increase in employment is the thinnest of silver linings for the sector, along with lower input prices and further growth in the consumer goods industry. However, the sharp decline in production of both investment goods and intermediate goods is an ominous sign.” 

Darren Jukes, a partner in PriceWaterhouseCooper's (PwC's) manufacturing practice, said the figures were very disappointing. "The drop of three points in today's PMI figures will not help lift the ongoing cloud of economic and unemployment uncertainty. Despite a slight increase in manufacturing employment, which was planned and needed to complete outstanding contracts, the level of new export business has dropped for the fourth consecutive month. 

"What is clear, however, is that the Eurozone crisis continues to impact the industry along with the recently reported slow down in some of the Asian economies. This is being felt across Europe with similar downward results being reported in Spain, Italy and Greece, whilst France and Germany have suffered the lowest level of manufacturing activity in more than three years." 

Lee Hopley, chief economist at the Engineering Employers Federation (EEF), said: “There isn’t much positive news to take from this survey with demand being hammered by persistent weakening in eurozone markets and slower growth in other parts of the world. While recent sharp falls in official data can be attributed to some impact from one-off events, the weak PMI raises question marks over whether we will see a bounce back in the near future. Government will need to return from recess with a lot more clarity around its plans to get growth back on track.”

Philippa Oldham, head of manufacturing at the Institution of Mechanical Engineers, said: “These figures are deeply worrying. Government keeps pledging its support for manufacturing but the sector is now shrinking faster than it has done in three years.

“If Government is serious about supporting this industry and rebalancing the economy away from an overreliance on financial services, then it needs to urgently develop a detailed manufacturing and industrial strategy with the collaboration of industry.

“This industrial strategy needs to be developed with a cross-party consensus to ensure UK industry has long-term political commitment. More work also needs to be done to help deliver greater capital investment in new production plants, machinery and training.”







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