UK Manufacturing PMI: Industry downturn deepens further in August

Posted on 4 Sep 2023 by James Devonshire

The UK manufacturing industry's downturn deepened in August, with output and new orders registering some of the steepest contraction rates outside of events such as the global financial crisis or COVID-19 pandemic, according to the latest S&P Global / CIPS UK Manufacturing PMI®.

August 2023 UK Manufacturing PMI key findings:

  • Manufacturing PMI at 39-month low of 43.0
  • Demand hit by weaker domestic and export conditions
  • Purchase prices fall at quickest pace since January 2016

August saw the seasonally adjusted UK Manufacturing PMI fall to 43, down on July’s reading of 45.3 and its lowest level since May 2020. A reading below 50 suggests contraction in the sector and we have now been in this territory for 13 months.

Against a weakenig economic backdrop, manufacturing production volumes dropped for the sixth consecutive month. Manufacturers say rising interest rates, , the cost-of-living crisis, export losses and concerns about the market outlook are all impacting demand.

August also saw manufacturing staff levels cut for the eleventh successive month, as a result of reduced intakes of new work, falling output volumes and cost control efforts.

Commenting on the latest survey results, Rob Dobson, Director at S&P Global Market Intelligence, said: “August saw a further deepening of the UK manufacturing downturn. The PMI sank to a 39-month low as output and new orders contracted at rates rarely seen outside of major periods of economic stress such as the global financial crisis of 2008/09 and the pandemic lockdowns.

“Manufacturers reported a weakening economic backdrop as demand is hit by rising interest rates, the cost-of-living crisis, export losses and concerns about the market outlook. While this is being felt across the manufacturing industry, business-to-business companies are especially hard hit. Intermediate goods producers saw the steepest drops in output, new orders and employment as a result.

“The downturn is also forcing companies into a more defensive posture. Purchasing activity, inventory holdings and staffing levels were all cut back in August as manufacturers strived to control costs, protect margins and operate in a much leaner and efficient manner.

“The ‘plus’ side of the downturn is that input costs are now falling at the quickest pace since January 2016 and inflationary supply chain issues are abating, which should help feed through to lower goods price inflation in the coming months. The survey data therefore suggest policymakers will become increasingly focused on concerns over the economy’s health as they mull the need for further rate hikes.”

Dr. John Glen, Chief Economist at the Chartered Institute of Procurement & Supply, said: “Another substantial fall in manufacturing activity, contracting for the sixth month in a row and the fastest rate since May 2020, showed that these are tough times for manufacturers.

“The constant pressures on business costs from inflation and the systemic weaknesses in the UK and global economies were also driving the fastest fall in new orders since the financial crisis, outside the pandemic years. As a result, manufacturers were forced to reduce the size of their business operations, their headcounts and reassess what business is likely to look like in the remainder of the year and in a highly competitive economic environment.

“However, those firms with orders in hand enjoyed the fastest delivery times since January and the rate of inflationary rises slowed to 2016 levels. Some price correction eased the pain for manufacturers who registered a four-month high in optimism about opportunities in the next 12 months. Small crumbs of comfort maybe as the sector remains in contraction and the marketplace cools even further, leading to headaches for policy makers about what steps to take to keep the economy from sliding into recession.”

Fhaheen Khan, Senior Economist Make UK, the manufacturers’ organisation, said: “Today’s data indicates manufacturing production has hit the brakes as slowing demand takes hold of business activity. It is no longer just high inflation that is eroding spending power, but combined with higher interest rates depleting our willingness to spend has made for an unpalatable cocktail.

“Manufacturers are now acting by cutting jobs and investment as the backlog of work starts to dry leading to an inevitable downturn in economic activity soon. Policy makers and rate setters will need to be wary of the cost of higher unemployment given prices remain elevated for many consumers and the loss of incomes will hurt many if we take this too far.”

Dave Atkinson, SME & Mid Corporates head of manufacturing at Lloyds Bank, added: “August’s data shows manufacturers continue to be impacted by a cocktail of economic challenges – from persistent inflation to restrained consumer spending – which is leaving a sour taste for the sector.

“We’re still seeing many manufacturers looking to the future, however, by investing in technology, such as intelligent automation to help them combat ongoing skills shortages.

“On top of that, the further reduction to the energy price cap announced last week should have a positive knock-on effect for consumer confidence, which would begin to address the current lag and hopefully paint a brighter picture for manufacturers in the months ahead.”

Accenture’s Industry X lead, Maddie Walker, said, “British manufacturers continue to bear the brunt of tough economic challenges with a fast fall in production. While continued improvements in global supply chains and falling energy prices could yet lift manufacturers’ confidence that they can return to growth, manufacturers will be focused on how to get their costs down and boost productivity. Over the coming months, we expect that manufacturers will continue to invest in robotics and AI and look to more cost-efficient options in their supply chain. As we saw during COVID-19, manufacturers know what it takes to be resilient in tough times.”

Cara Haffey, Manufacturing and Automotive lead at PwC UK said: “The 39-month low of 43.0 in this month’s reading is a blunt reminder of the challenging economic climate the sector is currently facing, along with workforce levels, which saw reductions for an eleventh successive month. With production volumes decreasing for six consecutive months, it’s clear that the combined challenges of rising interest rates and broader cost of living issues, declining demand from key global markets and efforts to reduce inventories are having a profound impact on operations. Incredibly challenging markets necessitate transformation and investing in technology and upskilling of people are routes that we are seeing clients take to mitigate the current volatility for added value.

“It’s once again encouraging that despite these ongoing difficulties, manufacturers maintained a positive outlook. Optimism hit a four-month high, as 56% of firms expect growth over the coming year due to hopes for revived market buoyancy, new product launches as well as acquisitions and diversification.

“August saw average vendor lead times shorten for the seventh consecutive month and purchasing costs also fell for the fourth month running, at the steepest rate since January 2016. As the PMI notes, the reasons for the falls were generally negative and reflected both weak demand for raw materials and reduced workloads. However, there may be some manufacturers who look to take advantage of cheaper costs and stockpile inventories and raw materials with future growth in mind.”

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