Downturn in UK manufacturing gathering pace says PMI

Posted on 1 Nov 2012 by Tim Brown

The UK Purchasing Manager’s Index has revealed that UK manufacturing conditions have deteriorated for the sixth successive month in October as companies continued to face a combination of declining export sales, weaker domestic demand and rising cost pressures.

At 47.5 in October, from a revised figure of 48.1 in September, the seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) fell for the second successive month.

Despite the poor October 2012 PMI figures, consumer goods producers also bucked the wider trend by saw improvement in demand.
Despite the poor October 2012 PMI figures, consumer goods producers also bucked the wider trend by saw improvement in demand.

This is the sixth month in a row where the PMI figure has been recorded below 50, which indicates a contraction in the sector.

The latest reading was broadly in line with the average for Q3 2012 as a whole. Production volumes were scaled back for the fourth straight month in October, with the rate of decline the second-sharpest during the past three-and-a-half years.

Commenting on today’s PMI data, Ms Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, said the while the slowdown in Europe continues and, concerns around prospects in other parts of the world are also starting to come to the fore.

“As ever, the picture isn’t universally negative as some industry sectors are bucking the weaker trend.  Nevertheless, the potential drag from further weakening in Europe remains the big risk on the horizon and will continue to drive caution across the sector,” said Ms Hopley.

The main factor underlying lower output was a further reduction in new work received. Total new orders fell for the seventh month running and at a faster pace than in September.

Manufacturers linked lower levels of new business to reduced inflows of new export orders and weaker domestic demand. New export business declined at the second-fastest pace in just over a year, mainly due to the ongoing economic weakness seen in mainland Europe.

There were also some reports of lower demand from clients in Asia. There were nonetheless some brighter spots in the UK manufacturing sector in October. Although conditions deteriorated in the intermediate and investment goods sectors, output in the consumer goods sector bounced back strongly from September’s contraction.

Rob Dobson, Senior Economist at survey compilers Markit said the the downturn in the UK manufacturing sector had gathered pace at the start of Q4 2012.

“Production and new orders fell at faster rates as manufacturers faced a quiet domestic market and a further deterioration in new export orders,” said Mr Dobson. “While the road to an export-led recovery is still blocked by the ongoing difficulties in the Eurozone, it is concerning to hear further reports of the global slowdown hurting trade with other regions such as Asia.”

Consumer goods producers also bucked the wider trend by seeing improved demand from both domestic and overseas clients. Manufacturing employment declined for the second successive month in October, although the rate of job losses was less marked than in the prior survey period. Where a reduction was reported, this generally reflected lower demand, redundancies and the non-replacement of leavers.

“The UK’s manufacturing industry continues to suffer from a potent cocktail of declining export sales, depressed demand and rising cost pressures which have resulted in a hangover that the industry has been struggling to shake off all year,” said David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply:

“The one vestige of hope for the industry comes from the consumer goods sector which bucked the trend in the previous month with export orders and domestic demand up. The consumer appears to be holding their ground despite the retrenchment of their business counterparts. However the consumer alone cannot take away the industry’s pain.”

Signs of spare capacity also encouraged some manufacturers to reduce employment. October saw backlogs of work fall for the twenty-first consecutive month, with the rate of contraction sharper than its series average. Manufacturers remained cost-cautious overall, leading to lower levels of purchasing and further depletion of inventory holdings.

The rate of reduction in input buying volumes accelerated sharply and was one of the fastest signalled during the past three-and-a-half years. Meanwhile, margins were squeezed further, as cost inflation hit a seven-month peak at a time when pricing power remained muted.