Manufacturing performance creeps below vital 50.0 mark

Posted on 3 May 2016 by The Manufacturer

April saw the Markit/CIPS Purchasing Managers’ Index (PMI) dip below the critical no-change gauge of 50.0 for the first time in more than three years.

At 49.2 – down from a revised 50.7 in March, the PMI was reportedly affected by a decline in both production and new orders.

Alongside the combination of softer growth in domestic demand and a reduction in new business from overseas, uncertainties relating to the oil and gas market, retail and the upcoming EU referendum had led some businesses to delay spending, according to Markit/CIPS.

Group CEO at the Chartered Institute of Procurement & Supply (CIPS), David Noble commented: In a month that saw the collapse of BHS, the troubles in the British high street are being felt just as keenly in Britain’s factories.

“Manufacturers are compensating for stalling new order growth by depleting their stocks, and dramatically cutting the amount of raw materials they buy from suppliers.”

Chief economist at EEF, Lee Hopley noted: “The sharp drop to a three year low and another month of reported job cuts could be the clearest sign yet that referendum uncertainty is starting to weigh on the real economy.

Lee Hopley, chief economist, EEF.
Lee Hopley, chief economist, EEF.

“However, this is just another straw on the back of a sector already grappling with the struggling oil and gas sector, softening domestic demand and weak order outlook from other parts of the world, all of which are failing to provide any counterbalance to the political uncertainty at home.

“Following on from the contraction in output in official data for the first quarter, it will require everything that could go right to come good in the second half of the year if manufacturing is to avoid another year of falling output.”

Head of manufacturing at Barclays, Mike Rigby 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.”

SME optimism on the up

On a more positive note and contradicting the overall PMI decline, the CBI’s latest quarterly survey revealed that conditions for the UK’s small and medium-sized businesses had stabilised over the past quarter.

The survey of more than 440 firms reported that total new orders and new domestic orders rose slightly in the three months to April – though export orders fell again.

However, optimism about demand for export over the year ahead also rose for the second quarter, with SMEs expressing greater confidence than larger firms.

Meanwhile, output was flat among small and medium-sized manufacturers, in line with the performance of the rest of the manufacturing sector, following a quarter in which they outperformed the sector as a whole. Expectations for the quarter ahead 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, director of Economics, CBI
Rain Newton-Smith, director of Economics, CBI.

CBI director for economics, Rain Newton-Smith commented: “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.”