UK Manufacturing PMI: industry contracts as Red Sea crisis hits supply chains and contributes to rising costs

Posted on 1 Feb 2024 by The Manufacturer

The downturn in the UK manufacturing sector continued at the start of 2024 with a decline of output and new orders.

January 2024 UK Manufacturing PMI key findings:

  • Manufacturing PMI rises to 47.0 in January
  • Output, new orders and employment contract
  • Input costs and selling prices both rise

This has led to additional job losses and cutbacks in purchasing and stock holdings. Manufacturers also experienced rising supply chain difficulties, as the Red Sea crisis led to the re-routing of input deliveries away from the Suez Canal.

The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) posted 47.0 in January, up from 46.2 in December but below the earlier flash estimate of 47.3. The PMI has signalled a deterioration in operating conditions in each of the past 18 months.

Four out of the five PMI sub-components – output, new orders, employment and stocks of purchases – were showing trends consistent with overall contraction. Manufacturing production decreased for the eleventh successive month in January, with the rate of contraction unchanged from December’s solid pace.

Companies linked lower output to weaker new work inflows, efforts to reduce inventory holdings and disruption caused by supply chain delays. Where an increase was reported, there was mention of work on existing contracts being used as a substitute for new orders to support production volumes.

Contractions in output were signalled across the consumer, intermediate and investment goods industries. All of these sectors also saw intakes of new work fall during January. Weaker demand in both the UK and overseas markets led to a further drop in total new orders at the start of 2024. Low customer confidence, order cancellations and client destocking also negatively impacted new business.

On the export front, UK manufacturers reported weaker intakes of new work from the US, mainland China, the EU, Canada and the Middle East. Rising geopolitical tensions focussed on the Red Sea route to the Suez Canal led to a marked increase in average vendor lead times during January, as inputs ordered from overseas were re-routed around the lower tip of Africa. Overall supplier performance deteriorated for the first time in a year and to the greatest extent since November 2022.

Some firms estimated that a minimum of 12-18 days could be added to vendor lead times for goods ordered from the APAC region. Disruption to that key global trade route also contributed to higher average input costs in January.

There were also reports of supplier price increases and rising costs for chemicals, electronics, energy, food stuffs, metals, packaging and timber. Part of the increase was passed on to clients in the form of higher selling prices, with output charge inflation registered for the fourth time in the past five months.

The start of 2024 saw manufacturing employment lowered for the sixteenth month in a row. Companies linked job losses to the ongoing downturn in the sector, which also contributed to cutbacks in purchasing activity and stock holdings. Input buying volumes fell for the nineteenth successive month.

Finished goods inventories fell at the quickest rate in almost two-and-a-half years, while the reduction in input stocks was the joint-steepest since November 2012 (matching that registered in August 2023).

UK manufacturers maintained a positive outlook despite the current downturn and persistent weakness of demand. Business optimism rose to a four-month high, reflecting new product launches, expectations of economic recovery and planned marketing efforts. That said, some firms remained concerned about weak market conditions and the risk of losing clients due to rising costs.

Commenting on the latest survey results, Rob Dobson, Director at S&P Global Market Intelligence, said: “The downturn in UK manufacturing continued at the start of 2024, with output, new orders and employment all reduced in January. The contraction was widespread, with declines in all three variables seen across the consumer, intermediate and investment goods sub-industries. The ongoing weakness is leading to an increasingly costcautious approach at manufacturers, compelling cutbacks in purchasing and stock holdings as companies aim to achieve efficiencies, protect cash flow and defend fragile margins.

“Cost and stock management initiatives are being complicated by the Red Sea crisis. Diverting purchased inputs, especially those sourced from the APAC region, around the Cape of Good Hope is raising prices and extending supplier lead times. Some of our panel members estimate that a minimum of 12-18 days could be added to some expected deliveries, disrupting production schedules and raising inflationary pressures at a time when manufacturers are already struggling with weak demand both at home and overseas. One small ray of light from the January data is manufacturers expect some of these issues may be temporary, with an increasing number (over 50%) still forecasting output to be higher 12 months out.”

Industry reactions to January Manufacturing PMI

Dave Atkinson, SME & Mid Corporates head of manufacturing at Lloyds Bank, said: “Tensions along international shipping routes are causing disruption for many manufacturers, and compounding existing challenges hanging over from last year.

“Despite this uncertain start to 2024, there are still growth opportunities for firms that can stay agile, focus on reshoring, and explore new supply chains that are opening up. As the sector hopes to move onto more secure footing in the months ahead, other opportunities remain for those that can capitalise on the growth potential linked to investing in new technologies and the green economy.”

Boudewijn Driedonks, partner, at  McKinsey & Company, said: “UK manufacturing output is inching closer to the magic ’50-mark’. This indicates a continuation of the recovery, after contraction started a year ago. If the UK continues on its current trend, it might enter growth territory by Q2. What’s particularly interesting is that businesses appear more upbeat than consumers, suggesting leaders are increasingly gaining confidence in overall market conditions, including energy prices, inflation and interest rates. And that’s despite pertaining concerns about purchasing demand growth”.

“Across the Eurozone, the recovery in manufacturing activity accelerated more than in the UK, bringing PMI levels broadly at par. The Eurozone is at a 10-month high, with especially export-heavy Germany recovering from a deep trough”.

“The deliberate drawdown in inventory continues, but for the first time we are seeing lead-times expanding driven by the Suez Canal situation. It will come to a point where businesses will not want to further decline inventories, which will likely bolster demand. Prices are also declining in the Eurozone, as we are seeing a passthrough in declining input costs. It seems that companies are not yet using the momentum to regain lost ground in margins over the last year. As the PMI has turned the corner and is close to reaching the 50 mark and inventories are low and lead times are expanding, companies may want to reevaluate their pricing strategies”.

“While the UK and the Eurozone have turned the corner and see an accelerated recovery starting 2024, today’s sub-50 PMI still indicates contraction and concerns remain. The ongoing Red Sea crisis and supply chain disruption is a case in point – just as inflation is beginning to cool-off.

“Manufacturers are becoming increasingly accustomed to operating in a consistently volatile environment. In particular – the ability to effectively scenario plan, separate signal from noise, and steadily handle overreactions to volatility – are becoming increasingly important. The latest activity scores may suggest businesses are increasingly putting this to practice.”

Maddie Walker, Industry X lead for Accenture in the UK, said: “New Year, but the same story for UK manufacturing, with production declining for the 11th consecutive month. We’ve entered a vicious cycle: as the sector shrinks, manufacturers become more cautious, reduce their stocks, and cut back on employment – all of which hinders growth. Meanwhile, the Red Sea conflict is the latest in a string of geopolitical events set to cause disruption to global supply chains.

“Slow international trade and weak domestic demand will likely continue to stunt production in the coming months, as the global economic outlook remains fraught. Manufacturers will be looking for ways to streamline their processes and match demand, without compromising on growth.

“Cutbacks, however, aren’t the only way to weather the economic storm. Manufacturers need to find methods of effectively collaborating with suppliers, to stay responsive and agile as world events cause uncertainty and impact economic trade. The wealth of recently developed digital technologies also offers an attractive solution, increasing accuracy and decreasing the timeframe of processes – maximising the profitability of manufacturing operations.”

Cara Haffey, Manufacturing and Automotive lead at PwC UK, said: “January’s Manufacturing PMI posted 47.0 in January, up slightly from 46.2 in December, but still signalling a deterioration in operating conditions in each of the past 18 months.

“The prominent point to highlight from this month’s reading is how supply chains continue to be exposed to geopolitical events – which pose significant market disruption. As the PMI notes, Red Sea tensions led to a marked increase in average vendor lead times during January, as inputs ordered from overseas were re-routed and supplier performance deteriorated for the first time in a year.

“With the PMI reporting that disruption to this key global trade route also contributed to supplier price increases and rising costs for chemicals, electronics, energy, food stuffs, metals, packaging and timber – this demonstrates the continued fragility of supply chains – and how operational resilience will continue to be a core focus for the sector.

“This news should ensure supply chains are prominent in the minds of UK board members, with a hope they are now more resilient than the past, given the learnings available from planning for Brexit, the response to the pandemic and dealing with chip shortages.

“Manufacturers continue to remain optimistic, with a four-month high reading of business optimism. This should provide reassurance for the sector, but not distract from efforts to make operations and supply chains as secure and resilient as possible. The optimism linked to new products and economic recovery mirrors some results from PwC’s Executive Survey with Make UK, which indicated a similar level of cautious optimism in the sector, with more than half of manufacturers planning to seize opportunities in new products over the coming year, and more than a quarter (27.3%) hoping to explore uncharted territory, and expand into new markets.”

Caroline Litchfield, partner and Head of Manufacturing and Supply Chain sector at Brabners, said: “The new year brought much of the same for manufacturers, which marked an eleventh consecutive month of contraction in January. But the Red Sea crisis creates fresh headwinds for those with low inventories and supply chains across Asia. Shipping bosses warn of severe disruption to global freight, which will dampen demand in the short-term and keep inflation higher for longer.

“With little respite from global crises, many manufacturers will welcome the Government’s new strategy designed to protect critical imports like medicine, minerals and semiconductors from the shockwaves of geopolitical instability or climate related disaster. Supportive government measures to cut red tape in times of need, building greater supply chain resilience, will support the sector’s uphill battle to recovery.”

Chris Barlow, partner at MHA, said: “This month’s Manufacturing PMI is flat, which highlights that conditions are still challenging for the sector. Sentiment was relatively positive at the start of the year, but this has waned as the month has progressed. The recent announcement from Tata Steel about the closure of the last two blast furnaces at the Port Talbot site will mean that the UK is the only nation in the G20 that isn’t able to produce its own steel. This does not send a positive message to the rest of the sector.

“The manufacturing industry is in the midst of a perfect storm. There are signs that there will be an impact on supply chains due to the events in the Red Sea and potentially also the new border controls on imports from the EU that were implemented yesterday, which will lead to further disruptions.

“These challenges are compounded by the uncertainty of when interest rates might fall, leading to further cost pressures. Manufacturers are going to be starting to feel the impact of corporation tax that came into force last April, as well as the increase in the minimum wage, which will have a knock-on effect and tax repercussions.

“With the Budget a matter of weeks away, UK manufacturing is keen for the government to seize the opportunity to make a decisive impact with targeted measures, tax breaks and grants to help stimulate growth and put the brakes on further decline. Full expensing, announced in last year’s Autumn Statement, while helpful, was a drop in the ocean compared to what manufacturers were looking for and hasn’t given them the confidence to invest.

“With an election also on the horizon, the sector needs strong leadership and a renewed, comprehensive Industrial Strategy focused on getting to grips with the challenges the sector is facing, whichever party is in power.”

Glynn Bellamy, UK Head of Industrial Products for KPMG, said: “While the headline figure shows monthly improvement for the UK manufacturing sector, domestic and international challenges remain, including the developing supply chain impact from shipping disruption in the Red Sea.

“Ocean freight costs have risen, as have supplier delivery times, contributing to increasing costs and slowing production for the manufacturing sector.  This threatens to reverse the recent good news story of falling inflation and once again brings supply chain resilience into focus and the mitigation of risks from extended global supply chains in a world of increasing geopolitical uncertainty.”

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