UK Manufacturing PMI: Industry downturn continues into Q2 but business optimism remains steadfast

Posted on 2 May 2023 by James Devonshire

The UK manufacturing industry's downturn continued at the start of quarter two, with output and new orders both contracting, yet manufacturers remained optimistic about the year ahead, according to the latest S&P Global / CIPS UK Manufacturing PMI®.

April 2023 UK Manufacturing PMI key findings:

  • Output and new orders contract
  • Rate of job losses eases
  • Manufacturers’ business optimism rises to 14-month high

April saw the seasonally adjusted UK Manufacturing PMI hit a three-month low of 47.8, down slightly on March’s reading of 47.9 but above the previous flash estimate of 46.6. In April, all five PMI components signposted the continuation of the sector’s current downturn. Output, new orders, employment and stocks of purchases all shrank, while vendor lead times improved, a sign of weaker demand. Manufacturers attributed the downturn in output and new orders to client uncertainty, destocking and cost-cutting initiatives.

Nevertheless, optimism among manufacturers remained buoyant. In fact, it hit its highest level for 14 months, with over 61% of companies reporting that they expect output to rise during the coming year.

Employment among medium- and large-sized companies dropped in April, albeit at the weakest pace for seven months. In contrast, smaller manufacturers  actually raised their employment levels, the fourth successive month this has happened.

In terms of trade, softer demand from the US, China and mainland Europe triggered a decrease in new business from overseas. As a result, new export orders contracted for the 15th consecutive month.

Commenting on the latest survey results, Rob Dobson, Director at S&P Global Market Intelligence, said: “The UK manufacturing sector remained in the doldrums at the start of the second quarter. Output and new orders contracted, as manufacturers felt the impacts of client uncertainty, destocking and tightening cost controls. There was no escape from the subdued mood of the market, with both domestic and export customers remaining reticent to commit to new contracts.

“There was better news on supply chains, as supplier lead times have now shortened in each of the past three months, providing welcome news in terms of improved resource availability and helping drive down raw material price pressures.

“Better-running supply chains have helped manufacturers reduce backlogs of orders, accumulated in prior months amid component shortages. But the concern is that these backlogs are being depleted, leaving firms with less work in hand. There may be some light on the horizon, as manufacturers remain stoically optimistic about the outlook for the year ahead. Over 60% of firms expect to expand production over the next 12 months. But demand will need to pick up in the months ahead to warrant any increase in production, and with the UK seeing stubbornly high domestic inflation coupled with a worsening export trend, risks seem skewed to the downside.”

Dr. John Glen, Chief Economist at the Chartered Institute of Procurement & Supply, said: “A further contraction in UK manufacturing in April makes for gloomy reading, but there is a silver lining in the fact that falling demand led to an easing of both supply and inflationary pressures on the sector.

“The overall downturn was driven by subdued market sentiment and client cost cutting, with consumer and intermediate goods producers hardest hit. Falling exports demonstrated diminishing demand from EU, US and China for UK manufacturing in response to ongoing Brexit and trade-related costs. The investment goods sector was the only notable bright spot, with export order growth hitting a 20-month high.

“The lull in manufacturing activity did provide breathing space for supply bottlenecks to work their way out of the system, with improved material availability and shorter delivery times being reported. While there is still uncertainty about the future and potential for further geopolitical instability to destabilise trade flows, there is hope that we are coming to the end of the significant supply chain disruption which has gripped the sector for the last three years.”

Dave Atkinson, SME & Mid Corporates head of manufacturing at Lloyds Bank, said: “Manufacturers are showing signs of optimism for future output growth, but are less confident about their near-term prospects – with inflationary pressures not cooling as fast as many had hoped.

“Businesses and consumers continue to spend cautiously, resulting in a subdued level of demand that could otherwise tip the sector back into growth.

“With lower energy costs yet to filter through to SMEs, firms will be looking for early indicators from the new Energy Efficiency Taskforce, which could help the sector to reduce costs and free up cash for investment.”

Maddie Walker, Industry X lead at Accenture, UK, said: “These results are a reminder that it is going to be a rocky road to recovery for the UK’s manufacturing sector. However, it’s positive to see an optimistic outlook remaining amongst companies, with widespread expectation that output will rise during the coming year. It’s also encouraging to see cost increases starting to slow as well as delivery times shortening, in a sign that some of the supply chain issues that have defined the sector for the past few years are starting to ease. Continued investment into supply chain resilience, digitisation and modernising the workforce will help stabilise manufacturers and position the sector well for a return to growth once demand improves.”

Michael McGowan, Managing Director at Bibby Foreign Exchange, said: “Hitting a three-month low of 47.8 in April, today’s UK Manufacturing PMI will likely fill many businesses with dread. Though the general economic narrative has moved on from recession, three consecutive falls in the PMI data bodes ill for many. It’ll surely cast a shadow over the growth ambitions of individual businesses already grappling with stubbornly high inflation in the UK and an uncertain long-term outlook for the global economy.

“So, despite their natural resilience, the picture remains bleak for many manufacturing businesses, especially those trading internationally. To better shore themselves up against the continuing twists and turns in the economy, UK manufacturers could do a lot worse than to review and carefully plan their future foreign currency strategies.”

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