Manufacturing output declines for the first time in three years

FALLING domestic demand has been blamed for the first fall in UK manufacturing output in more than three years.

The latest Markit/CIPS manufacturing Purchasing Managers’ Index fell to 49.2 in April, down from 50.7 in March. Anything below 50 indicates declining output.

It is the first time that output in the sector has fallen since March 2013 and it raises wider questions about the overall health of the economy.

While falling demand in the UK is the main reason cited for the decline, uncertainty prompted by next month’s EU referendum and the continuing decline in the oil & gas sector are also factors which cannot be overlooked.

Commenting, Carl Radd, Manufacturing Relationship Director at Barclays in the Midlands, said: “It was always on the cards that when growth in domestic demand, which has been supporting recovery, began to falter, the performance of UK manufacturing was going to look more vulnerable.  

“With the ongoing impact of a slowing global economy plus a lacklustre exporting performance continuing to weigh down on the sector, it has to be hoped that once the uncertainty over the EU referendum clears, we will see manufacturers increasing the vital levels of investment needed to boost recovery.”  

In a stark assessment, Martin Beck, senior economic advisor to the EY ITEM Club, said: “The tailwinds afflicting the manufacturing sector – concerns around the health of the global economy, uncertainty surrounding the result of June’s EU referendum and evidence of a broad slowdown in activity in the UK – means that the ‘makers’ will struggle to avoid a repeat in Q2 of the decline in output seen in the first three months of the year.

“The detail of the survey offered further causes for pessimism. Both the consumer and investment goods sectors registered declines in output, while survey respondents highlighted a weakening in both domestic and overseas demand. In addition, export orders dropped for the fourth month in a row, while jobs in the sector fell at the fastest rates since February 2013.”

The latest PMI seems somewhat at odds with the conclusions of the CBI’s latest Quarterly SME trends survey.

The CBI says the findings of its most recent survey tend to suggest that conditions for the SME sector stabilised over the past quarter, after deteriorating in the previous quarter.

The survey of 441 firms reported that total new orders and new domestic orders edged up slightly in the three months to April, although export orders again fell.

Optimism about export demand for the remainder of the year was more positive for the second quarter, with SMEs expressing greater confidence than larger firms.

However, there is more synergy when it comes to manufacturing.

The CBI said output was flat among SME manufacturers, which was in line with the performance of the rest of the manufacturing sector.

Nevertheless, it said expectations for Q2 remained strong.

Against this backdrop, investment intentions strengthened, with replacement and efficiency among the primary drivers of investment, while hiring intentions remain firm. However, concerns about skills shortages have picked up as a potential drag on output.

Rain Newton-Smith, CBI Director for Economics, said: “Higher spending on training is often a sign that skills shortages are biting again. This further underlines the need for business and government to work together in the coming months and make sure we get the design of the apprenticeship levy right, so it can deliver the quality skills training that firms need.

“While the depreciation of the Pound since mid-2015 will be welcomed by exporters, the Government could and should do more to help by establishing an exports commission that can look at the challenges and opportunities for exporters more closely.”