Manufacturing production falls at fastest pace since March 2009

Posted on 1 Aug 2012

This morning’s Purchasing Manager’s Index saw the health of British manufacturing nosedive during July, as production fell at the fastest pace since March 2009.

There has been a substantial decline in output and new orders in the manufacturing sector during July, according to data released by financial services firm Markit and the Chartered Institute of Purchasing & Supply (CIPS).

Rob Dobson, senior economist at Markit, said: “Companies scaled back output to the greatest extent since March 2009, as underlying demand remained weak and market conditions highly competitive. “Coming on the back of a 1.4% decline in manufacturing production in the second quarter, it looks like the sector remains a major drag on the overall economy.”

The downturn in the UK manufacturing sector gathered pace at the start of Q3 2012. With a reading below 50 registering a contraction of the sector, Purchasing Manager’s Index (PMI) score fell to its lowest level since May 2009. PMI dropped to 45.4 in July, down from a revised reading of 48.4 in June, as operating conditions continued to deteriorate – PMI having fallen in each of the past three months.

Mr Dobson added: “The July PMI survey suggests that the domestic market shows no real signs of renewed life, while hopes of exports charting the course to calmer currents were hit by our main trading partner, the euro zone, still being embroiled in its long-running political and debt crises.”

The level of new export business declined for the fourth month running and at the fastest pace since February 2009. The ongoing weakness of the euro zone market remained the principal drag on new export orders, although there were also some reports of a decline in new business received from Asia.

With new orders falling July saw backlogs of work decline at the sharpest pace since March 2009, with almost a third of survey respondents reporting a decrease. Outstanding business has now fallen throughout the past one-and-a-half years.

Input costs, including the cost of raw materials and energy prices, declined for the second straight month. Lower purchasing costs were linked to reduced chemical, commodity, oil, metal, paper and plastic prices. Exchange rates were also reported to have lowered the cost of certain imported goods.

However, manufacturers continued to pass on the higher raw material prices incurred earlier in the year, while a number also moved to protect (or recover) their operating margins.

Employment in the sector rose slightly for the first time in three months during July. Companies indicated that staffing levels had risen to complete outstanding contracts and as part of planned company expansions.

The weaker performance of the sector, and rising levels of cost caution, led manufacturers to implement a steep cutback in purchasing and reduce their inventory holdings.

Demand for raw materials and parts contracted at the second-steepest pace in three years during July, leading to a sharp reduction in pre-production stocks. Finished goods inventories fell to the greatest degree in 33 months as companies improve just in time manufacturing and hold back on producing goods that could take a long time to shift.

This has eased the pressure on supplier capacity, leading to a marked shortening of average lead times.

Philippa Oldham, head of manufacturing at the Institution of Mechanical Engineers (IMechE), commented: “These figures are deeply worrying. Government keeps pledging its support for manufacturing but the sector is now shrinking faster than it has done in three years. More work also needs to be done to help deliver greater capital investment in new production plants, machinery and training.”