Growth slows as firms eat up backlogs

Posted on 3 May 2011 by The Manufacturer

Dwindling domestic demand is threatening manufacturers’ order books as prices remain at near record levels, the latest CIPS/Markit Purchasing Managers’ Index finds.

Where anything above 50 represents growth, the headline PMI reading in April, taking into account new orders, output, employment, prices and supplier delivery times, was 54.6. This was down from a revised 56.7 in March – originally reported as 57.1 – and is a seven month low.

Export orders are still on the rise but growth in domestic demand has all but tailed off, according to the report.

Output growth – though lower than the sixteen year high witnessed in January – remained a strong level. However, manufacturers now report a marked reduction in backlogs of work which appears to account for this.

David Noble, Chief Executive Officer at the Chartered Institute of Purchasing & Supply said there are “clear signs that (the UK manufacturing industry) is running out of steam”. He warned that growth is too reliant on exports and compared manufacturers’ use of backlogs to fulfil output growth with consumers dipping into savings to maintain spending levels.

“The problem with this,” he says, “is that, just like savings, backlogs of orders will soon run out if they are not topped up. The falling level of backlogs for the third consecutive month at the same time as new orders slowing really is a worrying sign.

“What we are clearly seeing is a tale of two markets at the moment. Export orders continue to grow at a very healthy rate but domestic demand is suffering as a result of falling consumer confidence and spending. There are some UK manufacturers that are growing very strongly but it tends to be those with a strong export focus and that can truly compete on a global scale. It’s clear that manufacturing businesses cannot rely on domestic demand to drive business in the next few months.”

EEF chief economist, Ms Lee Hopley, said that the poor readings could be a temporary blip or they could be a sign that manufacturers will now witness varying success based on their markets.

“We need to be cautious about one set of results in a month which has seen a series of planned shutdowns and seasonal factors which could mean the dip is temporary,” she said.

“However, we may also now be seeing signals of the beginning of a divergence in fortunes for the sector, with export focused companies and sectors racing ahead on the back of a solid global recovery and a weaker outlook for those with a greater dependence on the domestic market.”

Price inflation was down only very slightly from March’s all-time-high, with increased input prices the main influencing factor. Delivery times lengthened significantly, partly because of the Japanese earthquake and tsunami.

However, employment levels remained at a strong rate of growth and have been positive now for 13 months.

The boyant german mnaufacturing industry led teh Eurozone PMI to rise to 58, from 57.5 last month which was the best rate of growth since April 2000. The Netherlands and France also perfromed well and tehre was strong rates of expansion in Italy, Ireland and Austria. Only Greece’s manuafcturing industry contracted.