How healthy is UK manufacturing?

LATEST productivity figures have painted a confusing picture of the health of the UK economy.

There is a mixed picture across the country,  with the latest Markit/CIPS UK Manufacturing PMI report showing that the performance of the UK manufacturing sector remained lacklustre in September, rounding off one of its weakest quarters during the past two years, despite contradicting reports from other organisations.

It said the generally subdued trends in both output and new orders during recent months had filtered through to the labour market, with manufacturing job losses registered for the first time since April 2013.

The headline seasonally adjusted PMI figure was 51.5, still showing growth but down 0.1% on August.

The PMI has now stayed above the 50 mark – which indicates growth – for the past 30 months. However, the pace of growth in Q2 and 3 this year has been weaker than those generally seen earlier in the current growth cycle.

The data has also provided a mixed picture for manufacturing. The trend in output growth signalled by the survey improved slightly last month, taking the rate of increase to a six-month high, but it was still well off the peaks seen during the opening quarter of this year. New order growth, meanwhile, slipped to the joint-weakest pace in a year.

There was also noticeable variation in the trends between the manufacturing sub-sectors. Consumer goods producers, which have been the star performers in recent surveys, saw a substantial slowdown in growth and a contraction in new order inflows for the first time in almost three-and-a-half years.

In contrast, intermediate goods producers saw a solid increase in output and investment goods production returned to growth. These trends were not repeated for employment, however.

Consumer goods sector headcounts rose, investment goods producers made little change in staffing levels and job cuts were signalled by intermediate goods companies.

Cost pressures shifted further to the downside in September, as companies reported lower prices paid for commodities (especially oil and oil-related costs). The rate of cost deflation accelerated to its steepest since February 1999 and remained among the fastest registered in the near 24-year survey history.

There was also mention of the exchange rate and competition among suppliers driving costs lower.

Average selling prices were reduced for the first time in three months during September, reflecting competitive pressure and some pass-through of lower input costs to clients. However, the rate of output charge decrease was only modest, with around 8% of companies reporting a reduction.

Rob Dobson, Senior Economist at survey compilers Markit, said: “The UK manufacturing sector remained sluggish at the end of the third quarter, stunned by a triple combination of a sharp slowdown in consumer spending, weak business investment and stagnating export order inflows. The survey is still broadly consistent with stagnation, or even a mild downturn, when compared to official data.

“Although some respite will have been felt through a sharp decrease in average input costs, the steepest in over 16 years, the generally lacklustre operating environment nonetheless encouraged firms to scale back employment for the first in two-and-a-half years. Job cuts (such as the 400 announced by JCB) send a signal that manufacturers are becoming more cautious about the future, which may lead to a further scaling-back of production at some firms in coming months.

“The ongoing malaise of the manufacturing sector will add to broader growth worries and supports dovish calls for a first rise in interest rates to be held off until industry returns to a firmer footing.”

On a brighter note, latest UK Labour Productivity as measured by output per hour grew by 0.9% from Q1 to Q2 to the highest level ever recorded.

Output per hour in services grew strongly in Q2 to a record high, but manufacturing output per hour fell by 0.5% on the quarter, continuing the exceptionally weak trend for this series since the economic downturn.

Commenting, Mike Rigby, Head of Manufacturing at Barclays, said: “With virtually zero inflation, low unemployment and weak oil prices, manufacturing would have been looking to make up ground over the past quarter. However, ongoing weakness in export orders, which is being exacerbated by the strength of sterling, continued lacklustre growth in the Eurozone as well as the slowdown in China, have continued to thwart export opportunities for manufacturers and the sector remains reliant on domestic demand to keep it steady.”

Peter Gallimore, Midlands’ manufacturing leader, DeloittePeter Gallimore (left), UK manufacturing industry leader at Deloitte, said the fall in PMI reflected the challenges currently faced by manufacturer

“These include the recent high profile scrutiny on the automotive manufacturing sector; a strong Pound and weak Euro continuing to make for difficult export conditions and squeezed margins; and the prolonged period of economic volatility in China creating supply chain uncertainty and impacting demand. All of these factors mean that the remainder of the year could be challenging for the industry,” he said.

But, he added with the PMI remaining over 50.0 there were still hopes the industry could prove resilient.

“Many organisations are focusing on advancing manufacturing processes, using data and technology to inform and accelerate changes, and investing in skills and talent. All of these should strengthen growth in the longer-term,” he said.

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