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August saw surprise improvement in UK manufacturing

03 September 2012

The downturn in the UK manufacturing sector showed signs of easing during August, following a severe contraction in the previous month.

Graph courtesy of Markit/CIPS PMI

The seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) rose to 49.5, from 45.2 in July, a four-month high and only slightly below the 50.0 mark that separates expansion from contraction. Manufacturing production fell for the second successive month in August, albeit to a much lesser degree than in July. The decline in output was centred on the investment goods sector. Output rose solidly at consumer goods producers, while intermediate goods companies saw a marginal return to growth. 

The main factor underlying the downturn in production during recent months has been weak market conditions. Although August saw inflows of new work hold broadly steady at July levels, this followed four consecutive months of contraction.  The broad stagnation of new orders was still a marked improvement on the severe decline seen in the prior month as companies reported a modest increase in new work from domestic clients. The rate of decline in new export orders also eased sharply, despite weak demand from Europe.

Manufacturing employment rose slightly for the second successive month in August. Payroll numbers were increased at SMEs, but continued to fall at large-scale producers. Where an increase in employment was reported, this mainly reflected ongoing efforts to clear backlogs of work. Average input costs declined for the third month running during August, reflecting lower metal and plastic prices. There were also reports that weaker demand for raw materials and exchange rate factors had reduced the cost of certain inputs.

However, the rate of deflation eased sharply, mainly due to higher prices for oil and related byproducts. UK manufacturers continued to raise their average selling prices in August, reflecting efforts to recover some of the margin lost earlier in the year. Output charges have now increased throughout the past 34 months. However, the rate of inflation was only modest as strong competition and weak demand restricted the pricing power of a number of firms. August saw manufacturers maintain a preference for reduced holdings of both pre- and postproduction inventories. Purchasing activity was also scaled-back.

Lower demand for raw materials reduced the pressure on supplier capacity, leading to a further shortening of vendor delivery times. Improved lead times also reflected successful negotiations with suppliers. 

Commenting on today’s PMI data, Engineering Employers' Federation (EEF) chief economist, Lee Hopley said it was a better than expected outturn for manufacturing activity in August, but the sub-50 reading still signals contraction. "UK manufacturing is facing tough times as external demand looks fragile," she said. "However, with signs that some recruitment is still taking place amongst SMEs there is hope that companies have a bit more confidence about their medium term prospects. Taken together with another round of awful data from Europe, the outlook for export-focused manufacturers, and hopes of an export-led economic recovery, continue to look pretty challenging.”

Over the past quarter the UK’s manufacturers have seen some of the toughest trading conditions since the end of the recession, according to a survey released today (September 3) by the EEF and business advisers BDO LLP.

In response to EEF & BDO’s previous survey (6 June 2012) manufacturers had anticipated some softening in output and orders, but today’s survey showed a more marked weakening than expected across a range of indicators. The balance of responses on output over the past three months fell to its lowest level since 2009 Q4 and the orders balance was the weakest since 2010 Q1.

The survey clearly indicates that slower demand both at home and overseas is hitting order books, with responses on UK orders turning negative for the first time in ten quarters. And further analysis of our survey results suggests that the drop in export orders is not limited to sluggish demand in crisis-hit eurozone economies.

Lee Hopley says the weaker global outlook precipitated by the on-going economic challenges in Europe has clearly hit home in this latest survey. "Pockets of growth still remain in some sectors, but overall confidence appears to be draining away," she says. "The sharp drop in export balances over the past quarter is a particular concern given their importance to UK manufacturers and also our economy’s reliance on exports as a source of growth.

“However, some positive news can be taken from the improvement in the short term outlook and the continuing commitment to invest across manufacturing, as companies look to their competitiveness and market opportunities in the medium term.

“It’s encouraging to see that companies are not planning for a further deterioration in conditions as we head into the final months of the year. But, the risks of a more prolonged period of weak growth in global markets, which would continue to make economic rebalancing an uphill struggle, can’t be ruled out.”


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