UK Manufacturing Production Falls at Fastest Pace Since March 2009

August 03, 2012 /

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 (PMI) 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.

Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI: “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 hit by 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, Chief Executive Officer at the Chartered Institute of Purchasing & Supply: “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.”


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