UK manufacturing sector starts third quarter on softer footing

01-Aug-2018

The softer growth patch of the UK manufacturing sector continued at the start of the third quarter.
July saw slower rates of expansion in both output and new orders, as weaker growth of new work from domestic sources offset a stronger increase in new export orders. Price pressures also remained elevated as a strong increase in average input costs led to the steepest rise in selling prices since February.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to a three-month low of 54.0 in July, down from 54.3 in June and well below the highs achieved around the turn of the year. That said, the PMI remains comfortably above its long-run average of 51.8.

July saw the weakest rate of expansion in UK manufacturing output in 16 months, as production growth was stymied by a concurrent easing in the pace of increase in new orders. The domestic market was the main focus of the slowdown in new business growth, as new export work increased at the fastest pace for six months.

Companies reported improved demand from mainland Europe, the USA, China and the Middle-East. Some firms noted that promotional activity and new product launches had supported sales efforts in overseas markets.

The strongest growth of both production and new orders was seen at investment goods producers during July. The consumer goods industry also fared relatively well, as growth of output and new work remained solid (albeit weaker than in June).

In contrast, intermediate goods production contracted for the first time in two years, as the rate of expansion in new business slowed sharply to near-stagnation.

Employment rose for the twenty-fourth month in a row during July, with job creation sustained across the consumer, intermediate and investment goods industries. Manufacturers linked increased staffing levels to planned company expansions, higher output and efforts to reduce backlogs of work.

July saw the degree of positive sentiment dip to a 21-month low, amid reports of uncertainty regarding both Brexit and the exchange rate. That said, almost 48% of companies still expect output to be higher in one year’s time, compared to just 8% forecasting a contraction. Some linked their optimism to capital investment, planned company expansions, new product launches, and research and development activity.

Input cost inflation remained elevated in July, as rising commodity prices and shortages of certain raw materials drove up costs. Part of the increase was passed on to clients, leading to the steepest rise in selling prices since February.

Rob Dobson, director at IHS Markit, which compiles the survey, said:

“UK manufacturing started the third quarter on a softer footing, with rates of expansion in output and new orders losing steam. The upturn in the sector has eased noticeably since the back-end of 2017, meaning that manufacturing has failed to provide any meaningful boost to headline GDP growth through the year-so-far.

“The July survey data also shows that the performance of the sector is becoming more uneven, with solid output growth in the investment goods industry being largely offset by intermediate goods production contracting for the first time in two years. As the intermediate goods sector supplies other manufacturers, taken alongside weaker growth of total new orders and a drop in business confidence to a 21-month low, this all suggests industry is unlikely to exit this soft patch in the near future.

“The prices picture remained mixed in July. Cost inflation eased, whereas selling prices rose at the quickest pace in five months. The financial markets still seem to have an interest rate increase nailed on for August. However, if the combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored in the larger service sector, the Bank of England’s decision will be far from unanimous and they may even yet find some cause for pause.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said:

“There was a flatline feel to manufacturing this month, as the sector held its ground, but only just. Overall production slowed, whilst new order growth took a leisurely pace, and it was the unbalanced reliance on export orders that kept the sector afloat with domestic clients keeping their distance.

“This general manufacturing malaise was compounded by a scarcity of essential raw materials and vendor delivery times lengthened at a
pace not seen for ten months as supply chains stuttered and stumbled to meet contractual obligations.

“On the price front, firms raised client prices again in a bid to prevent another sudden increase in their own costs from gnawing away at hard-won profits. But, this strategy may not offer long-term solutions as uncertainty remains enemy no.1. Should operating conditions remain unchanged, this damp squib of a performance may persist and the UK has to look to other sectors to inject some vitality into its economic performance.”