UK Manufacturing PMI: industry downturn continues amid weak demand and ongoing Red Sea crisis

Posted on 4 Mar 2024 by James Devonshire

The UK manufacturing industry's downturn continued in February, with production and new orders both falling, as the knock-on effects of the ongoing Red Sea crisis caused disruption to supply chains, according to the latest S&P Global UK Manufacturing PMI®.

February 2024 UK Manufacturing PMI key findings:

  • Manufacturing PMI at 47.5 (10-month high)
  • Production declines as new order intakes fall
  • Red Sea crisis leads to supply disruption

UK manufacturers continued to face challenging conditions in February, as the ongoing crisis in the Red Sea delayed raw material deliveries and higher costs for businesses, leading to production capabilities being impacted. In an attempt to secure supply, some manufacturers turned to more expensive markets closer to home, further driving up costs. The reality is manufacturing businesses currently face a difficult trade-off: accept delays caused by re-routed shipping or pay higher prices for supplies closer to home.

The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) was 47.5 in February, up from 47 in January and above the earlier flash estimate of 47.3. Despite remaining below the 50 mark, which indicates growth or expansion in the sector, February’s PMI was the best since April 2023. Nevertheless, the UK manufacturing industry has now posted below 50 for the past 19 months.

Four out of the five PMI sub-components – output, new orders, employment and stocks of purchases – showed trends consistent with contraction in february. In fact, the only sub-component to have a positive effect on the PMI level was suppliers’ delivery times, which lengthened to the greatest extent since July 2022. However, as S&P Global points out, the increase in lead times was driven by supply disruptions as opposed to rising input demand, this trend is more a symptom of the challenging situation than a positive in itself.

Manufacturing production decreased for the twelth successive month in February, however, the overall rate of decline eased to a three-month low.

Manufacturers indicated that new business decreased for the eleventh month in a row in February, against a backdrop of client destocking, subdued market confidence and financial pressures, all of which resulted in lower work intakes from both UK and overseas based customers.

For comparison, the Eurozone Manufacturing PMI was 46.5 in February (a two-month low), driven entirely by a drop in the largest economy of the single currency union, Germany, which registered its sharpest deterioration in four months.

Commenting on the latest survey results, Rob Dobson, Director at S&P Global Market Intelligence, said: “UK manufacturers faced challenging circumstances in February, as the ongoing impact of the Red Sea crisis delayed raw material deliveries, inflated purchase prices and impacted production capabilities. There were also knock-on effects for demand, as new export orders were hit by both supply disruptions and higher shipping costs. Production volumes subsequently contracted for the twelfth successive month while total new orders fell at the sharpest rate since October.

“The impacts were felt particularly hard on the price and supply fronts. Input cost inflation hit an 11-month high, leading to a further increase in selling prices. Average supplier lead times meanwhile lengthened to the greatest extent since mid-2022. Several manufacturers noted that they faced the difficult choice between accepting delays from re-routed shipping or facing the prospect of paying higher prices to source from closer to home. This comes at a time of already heightened cost caution at manufacturers in response to weak demand, as highlighted by further cuts to employment, purchasing and inventories in February.

“Although the supply impact and effect of prices is muted by standards seen at the height of the pandemic, any upward pressure on inflation will be a concern to policymakers and may add to calls that it is too early to be confident on the timing of interest rate cuts.”

Industry reactions to February Manufacturing PMI

Huw Howells, Managing Director of Manufacturing and Industrials at Lloyds Bank, said: “With another rise in February, manufacturers impacted by tensions along international shipping routes, as well as rising costs and supplier disruption, are having to adapt – such as by focusing on reshoring and exploring new supply chains.

“Across the sector, segments are facing different challenges and opportunities, and some are more impacted than others. For example, the original equipment manufacturer space appears in good health, with a series of strong 2023 results signalling good momentum for the year ahead.

“Overall, while headwinds remain, there is plenty to be positive about for the coming months.”

Glynn Bellamy, UK Head of Industrial Products for KPMG, said: “Shipping disruption in the Red Sea contributed to increased supply chain delays over the last month, also causing related price increases and hitting production for some manufacturers. Other parts of the UK manufacturing sector are less impacted by this issue and also less exposed to the subdued consumer demand for certain manufactured goods. As such it continues to be a mixed picture for UK manufacturing right now. But taken as a whole, the growth remains limited.”

Mike Thornton, national head of manufacturing at RSM UK, said: “The manufacturing PMI in February continued to show signs of industry stagnation at 47.5, up marginally from 47 in January, with falling new export orders and employment indices reflecting subdued demand and dampened industry outlook.

“The sharp drop in the latest employment index to 42.3 is particularly concerning, as this is the lowest level since the pandemic in June 2020. As new export orders and suppliers’ delivery times fell it’s clear the ever-changing geopolitical landscape and the ongoing supply chain disruption caused by the Red Sea crisis is impacting industry confidence.

“Despite uncertainty and instability in the market, now is the time to be addressing existing skills shortages and considering what the future workforce needs to look like. Whether its hiring a new workforce to help implement key technology, such as AI, or upskilling talent with more traditional skillsets. Aside from future-proofing the workforce, when demand starts to pick up, manufacturers run the risk of being overwhelmed and unable to deliver on projects if they maintain low staffing levels.

“Industry needs government to fast track a number of infrastructure projects to improve demand and to stimulate low productivity. This will take time, but it does need addressing, as the UK’s infrastructure spend is far behind the OECD average. Manufacturers will therefore be hoping next week’s Spring Budget focuses on upskilling and long-term investment by means of reforming the apprenticeship levy to better support businesses with training costs, incentivisation and ensuring they are equipped to deliver projects using new technologies.”

Maddie Walker, Industry X lead for Accenture in the UK, said: “March is now upon us, but conditions remain frosty for the manufacturing sector, as production falls for the 12th consecutive month. Inflationary pressures, weak consumer demand, and threats to the supply chain have driven down output – provoking declines in innovation that have compounded the problem.

“Despite the rate of decline easing, significant challenges persist for manufacturing. The cost-of-living crisis has eaten away at consumers’ savings, and although inflation is set to slow, businesses can’t rely on a sudden rebound in demand. At the same time, high energy costs and steep raw material prices have combined to raise financial pressures for manufacturers. This, along with geoeconomic fragmentation, has stemmed the flow of energy, commodities, and raw materials from country to country – dramatically restricting production schedules and capacities.

“There’s no doubt this is a time for caution; but manufacturers should beware of slipping from caution into stagnation. By adopting innovation and technology to streamline and automate processes, they can optimise production during these testing circumstances while helping the UK to remain competitive for a brighter future.”

Caroline Litchfield, partner and Head of Manufacturing and Supply Chain sector at Brabners, said: “Supply chain disruption rumbles on in the wake of the Red Sea crisis, extending lead times and inflating shipping prices. Such headwinds resulted in manufacturers facing a 12th consecutive month of contraction in February.

“These challenging conditions are set to endure as skills shortages also continue to create barriers to growth across the sector. As we are seeing within aerospace and automotive, it is imperative that private operators proactively address these challenges. Many factories, though, are looking for targeted financial support to aid the process, so subsidies or incentives in relation to skills – particularly green ones – will be high on wish lists as the Chancellor reveals his Spring Budget next week.”

Cara Haffey, Manufacturing and Automotive lead at PwC UK said: “Despite rising to a 10 month high of 47.5 in February, the UK Manufacturing PMI is still contracting and shows the ongoing disruption to global trade caused by events in the Red Sea and Suez Canal. Manufacturers are continuing to do their best to circumvent these issues, as vendors and suppliers test the agility of their supply chains by sourcing alternate routes. However, rerouting supplies, such as around Southern Africa, as well as sourcing more local suppliers both carry added cost implications – which will not be welcome news for the sector.

“Challenges, though unsurprising, were acutely demonstrated with production falling for a twelfth consecutive month and new business decreasing for an eleventh, as well as staffing levels witnessing a reduction for the seventeenth successive month in February. The sector may well be looking to next week’s Spring budget to offer signals of assurance. These could come through policy direction in order to help with growing a future-fit and sustainable workforce, reducing trading costs and barriers, as well as, leveraging the use of existing and emerging technologies to drive innovation, research and development.”

Boudewijn Driedonks, partner, at McKinsey & Company, commented: “Recent optimism around a recovering UK manufacturing sector remains fragile – it’s now one and a half years of declining manufacturing activity. Although the Red Sea crisis plays a role in cost and lead times, what’s driving down activity is the persistently softening demand. Output remains below the critical no-growth threshold of 50 and recovery continues at a snail’s pace. This may further influence inflation, but it may not be positive news for the UK economy.

“Although 12-month inflation may have stuck to 4% in January, three-month inflation is now in negative territory for the first time since 2020. The soft demand reported in manufacturing PMI is not likely to drive this up. We are getting close to the 2% inflation target.

“On the flip side, we’re seeing a handsome expansion of service sector activity, which was well over the pivotal 50-point mark in the most recent Flash data. This partially compensates for the lack of growth in the manufacturing sector. All of this provides interesting context for the Budget next week.

“Across the Eurozone, there is increasing divergence in manufacturing activity. This marks a stark difference to last year where trends across countries were on a more similar trajectory.

“Despite a minor recovery at the beginning of the year, Germany – the manufacturing plant of Europe – saw a sharp unexpected downturn, reaching its lowest levels in four months. Grappling with greater exposure to China as one of the headwinds, this decline in output is pushing the brake pedals on a broader Eurozone recovery.

“However, the contraction in French manufacturing activity eased significantly. Output rebounded sharply, reaching a six-month high. Zooming out, despite recovery in the services sector moderating the downturn in activity, manufacturing continues to bring the Eurozone down into overall contraction territory, and the trend to recovery we saw late last year seems to have lost some steam.

“Manufacturers are starting the year in a market characterised by disinflation and soft demand. They will have to be agile in their pricing strategies and be creative in looking for pockets of growth, which are clearly shifting. UK manufacturers will envy their colleagues in service industries this spring – and hope to build stronger competitiveness on the international stage.”

Ginni Cooper, partner at MHA, commented: “While the Manufacturing PMI saw a modest increase in March, challenges remain for the sector. The persistent theme of uncertainty is holding UK manufacturers back from significant expansion. The still too-high interest rates, supply chain woes, and the upcoming election are all feeding into a lack of confidence in investment.

“In conjunction with a backdrop of macro-economic woes since 2019, the manufacturing sector, like all industries in the UK, has been hit by multiple tax and payroll changes which are putting a real squeeze on companies who often only have razor thin profit margins. The increase in Corporation Tax that came into effect in April last year is now starting to feed through into our clients; the hike in minimum wage payments is causing a ripple effect across the workforce; and the new QIPS regime, which accelerates tax payments, are all heavily impacting cash flow.

“Over the years, there has been a yoyoing of the capital allowances regime which has caused further uncertainty about the future. Many manufacturers have already taken advantage of the super deduction, so may not have the capital to invest further or, due to economic uncertainty, are simply reluctant to commit.

“We’re not expecting the Chancellor to pull any rabbits out of the hat for the manufacturing industry in next week’s Budget, but the sector requires stability to give it the confidence to invest. The lack of a UK Industrial Strategy will continue to hold the sector back, and for the country to have sustainable long-term growth in manufacturing, which is still such a vital part of the economy, we need to see government listening to its concerns.”

Michael McGowan, Managing Director of Foreign Exchange, at Bibby Financial Services: “Despite a rise in this month’s UK Manufacturing PMI, the sector continues to contract. It’s clear that the pressure to tread carefully is bearing down on manufacturers as they look for ways to turn a profit.

“And geopolitical volatility isn’t making matters any easier. Whilst many may have hoped to see de-escalation in the Red Sea by now, the crisis drags on. For SME manufacturers in particular, events in the Middle East have only compounded the complex set of issues facing them at home – from inflation to high interest rates to the continued impact of Brexit on overseas trading.

“Yet UK SMEs remain resilient and optimistic. Our recent research showed for example that over half of SME manufacturers (52%) expect export volumes to increase over the next 6 months. They’re poised to navigate continuing challenges, but they’ll also require the support of a government that can set out a clear path for growth in the months ahead.”

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