The Markit/CIPS UK Manufacturing PMI report and reaction from Lloyds Bank
Summary:
February saw the rate of expansion in the UK manufacturing sector slow back towards the stagnation mark. Output growth ased sharply, as levels of incoming new business showed little movement on one month earlier. The slowdown was also reflected in the labour market, with job losses registered for the second straight month.
At 50.8 in February, down from 52.9 in January, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI®) posted its lowest reading since April 2013 – the first month of the current 35-month sequence of expansion.
The growth rate of manufacturing production slumped to a seven-month low in February, led by sharp decelerations in the consumer and investment goods sectors.
Both the capital and consumer goods industries saw levels of total new business decline in February, reflecting subdued trends in domestic and foreign demand. The intermediate goods sector saw new order volumes tick higher. Subsequently, output growth in this category slowed less sharply than at consumer and investment goods producers.
The level of new export business placed with UK manufacturers declined for the second straight month in February. Companies reported weaker order inflows from Brazil, mainland Europe, Russia and the USA (Please note that the survey collection window ran from 12-24 February, meaning that the vast majority of responses were received before the sharp falls in the sterling exchange rate at the start of week beginning 22 February).
Manufacturing employment fell for the second successive month in February, although the rate of reduction was only mild. Job cuts were registered in both the consumer and investment goods categories. Intermediate goods producers reported a negligible increase in head counts.
Price pressures remained on the downside during February, as both input costs and output charges fell further. The rate of purchase price deflation eased to a seven-month low, but remained strong by the historical standards of the survey.
Companies reported lower costs for commodities (especially oil). There were also mentions of competition between suppliers driving down input prices.
Manufacturers passed on part of the decrease in costs to their clients, leading to a reduction in factory gate prices for the sixth straight month. However, the rate of decline was slower than in January.
Rob Dobson, senior economist at survey compilers, Markit, said:
“The near-stagnation of manufacturing highlights the ongoing fragility of the economic recovery at the start of the year and provides further cover for the Bank of England’s increasingly dovish stance.
“The breadth of the slowdown is especially worrisome. The domestic market is showing signs of weakening while export business continued to fall. Price pressures also remained firmly on the downside, with the survey signalling input costs falling at a double-digit annual pace and average factory gate selling prices showing a further decline. A lot of this is driven by the ongoing weakness of global commodity prices. However, there are also signs that weaker growth is driving up competition between manufacturers to secure new business and among their suppliers too.
“While these factors will help keep a lid on inflationary pressures, it is worth noting that the recent sharp drop in sterling came late in the survey collection window and so is not yet fully reflected in the results. Although sterling’s drop will hopefully boost exports, the likely increase in import costs in coming months will be unwelcome to manufacturers, especially given the imminent introduction of the new National Living Wage.”
David Noble, group chief executive officer at the Chartered Institute of Procurement & Supply, said:
“A distinct lack of progress has revealed a disappointing slowdown amongst manufacturers in February, with the weakest overall performance for nearly three years. Nevertheless, the overall index still remained in positive territory – but only just.
“The trend in staffing levels also registered a downward trajectory, with some job losses thrown in, and only the intermediate goods sub-sector showing signs of employing more staff. Intermediate goods was also the only bright spot in terms of new orders and showed a less marked slowdown in output growth than the other sectors.
“Manufacturers reduced their input stocks for the fourth month in a row in anticipation of a slowing growth rate and poor demand. Despite a cut in purchasing, suppliers’ delivery times lengthened for the thirty-third month running.
“Demand from the domestic market was weak and there was little hope to be gleaned from export orders which were in a similar downbeat mood. It appears the global slowdown is continuing to challenge markets and though it may be too soon to envisage another financial downturn, the possibility will have crossed the minds of key decision makers.”
Commenting on behalf of Lloyds Bank Commercial Banking following the release of the Markit/CIPS UK Manufacturing PMI report, Dave Atkinson, head of manufacturing at Lloyds Bank Commercial Banking, said:
“Continued volatility in the financial markets and signs of a slowdown in China are dragging on the confidence of the British manufacturing industry. The relative stabilisation of crude oil prices has lifted the market marginally, but will do little to allay fears of further falls in output.
“Factory bosses will be tested in the coming weeks as the looming uncertainty of the EU Referendum starts to hang over management teams. Businesses will be exploring the impact it could have on their operations and investment in the long-term.”
