The UK manufacturing sector contracted in October, with output growth slowing and new orders declining, new figures released on Friday show.
According to the S&P Global UK Manufacturing Purchasing Managers’ Index™ (PMI®), the UK manufacturing sector faced a lack of market optimism, slower economic growth, stretched supply chains and apprehension ahead of the Chancellor’s Autumn Statement, the details of which had not been announced when the October PMI survey was undertaken. These factors resulted in reduced intakes of new work and a near-stalling of output growth.
The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index™ (PMI®) posted 49.9 in October, down from September’s reading of 51.5 and below the earlier flash estimate of 50.3. This is the first time the sector has fallen below the neutral 50.0 mark—which signifies growth or decline—since April.
Eurozone manufacturing slump eases slightly in October but remains in overall decline
The Eurozone manufacturing sector’s downturn continued in October, although it did ease slightly, hitting a five-month high.
The HCOB Eurozone Manufacturing PMI—a measure of the overall health of eurozone factories compiled by S&P Global—increased to 46.0 in October, from 45.0 in September. October’s sub-50.0 figure was the 28th successive month in which the health of the goods-producing economy has deteriorated, marking the longest downturn since survey data were first collected in 1997.
Commenting on the Eurozone PMI data, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said: “There is one bit of good news in these numbers: the recession in the manufacturing sector did not deepen further in October. Production dropped at a slower pace than in the previous month, and new orders fell less sharply. As a result, according to our GDP nowcast, which takes into account numerous other indicators in addition to the PMI, industry output could shrink by 0.1% in the fourth quarter.”
Consumer and investment goods buoying manufacturing
In contrast to last month’s PMI, which saw intermediate goods helping to drive demand, this sub-category witnessed a marked output cutback in October, with only consumer and investment goods registering output growth last month.
Higher production was mainly sustained through efforts to complete existing contracts and also contributed to a mild building up of inventory holdings. Both of these compensated for the first outright contraction in new order intakes since April.
Positively, manufacturing employment increased in October, the third time this has happened in the past four months. Businesses attributed this rise to higher production and efforts to clear backlogs of work, however, the rate of increase was only modest. Many firms indicated that they did not want to incur additional costs ahead of last week’s Budget.
Ongoing supply chain issues continued in October, with vendor lead times lengthening for the 10th month in a row. Shipping delays, port strikes, capacity shortages and the ongoing issues in the Red Sea were all cited as factors contributing to these increased lead times.
‘Uncertain footing’
Rob Dobson, Director at S&P Global Market Intelligence “UK manufacturing started the final quarter of the year on an uncertain footing amid speculation on government policies ahead of the Budget, which was widely reported to have led to a wait-and-see approach on investment and spending. This domestic headwind, combined with an ongoing loss of export business, led to the first outright contraction in new work intakes since April. Output growth came close to stalling as a result.
“The generally lacklustre environment was also reflected in the headline PMI slipping below its neutral 50.0 mark and business optimism hovering only slightly above September’s nine-month low.
“There was better news on the price front. Input cost inflation fell to a ten-month low, easing to one of the greatest extents in the 33-year survey history. Selling price inflation also moderated. This may provide some headroom for policy makers to support growth if demand weakens.
“The November PMI will be especially keenly anticipated to see the near-term impact of the Budget on business conditions and in particular the effect on confidence.”
Industry reactions to October PMI
Maddie Walker, Accenture’s Industry X lead in the UK, said: “A dip in the UK manufacturing PMI shows precarious business confidence has hurt demand and new orders, but there remains cautious optimism within the sector as pricing pressures start to ease. Manufacturing firms will be looking to move on from their holding pattern, now the Budget has been announced, and can pursue plans for growth. Investment in infrastructure and manufacturing digital technologies will be welcome news and there is renewed vigour to explore how technology can solve for productivity and profitability challenges. However, technology, like 5G, automation, and industrial robotics, cannot solve problems on their own. It’ll be bold businesses that bring their people, processes, and technology stack together to reinvent their operations, while equipping the workforce with skills to make the most of AI, that will stand the best chance of success.”
Boudewijn Driedonks, partner at McKinsey & Company, said: “Momentum has gone into reverse for manufacturing. Like the rest of the Eurozone, weak exports are not being offset by domestic demand.
“New export orders were down for the 33rd consecutive month. While an uplift in domestic demand propelled manufacturing output since April. Like the Eurozone, the UK manufacturing industry is feeling the effects of lagging global competitiveness and demand. And while a short-term month-on-month expansion over the last few months gave rise for relative optimism, the structural challenges for competing on the global stage remain.
“While the survey was conducted before the UK budget was announced, responses suggest that manufacturers do not see strong reasons to shift their expectations.
“Actions that can help stimulate manufacturing include R&D spending, reducing energy costs and attracting capital investments. Companies can also think about allocating more of their growth capital to new ventures or spinoffs. For instance, our latest research shows that organisations which allocate 20% of their growth capital to new ventures or spinoffs achieve 2% higher revenue growth than those that don’t.”
Christine Hart, Legal Director in the Manufacturing and Supply team at independent law firm Brabners, said:“It’s a shame to see the strong growth of the manufacturing sector over the last five months falter. This contraction reflects wider uncertainty that swelled in the run up to the Autumn Budget and was compounded by a weaker month for export-heavy sectors, like new car manufacturing.”
“Manufacturers also face some new fiscal headwinds following the Budget like increases to National Insurance contributions and a higher minimum living wage. Management teams will have to balance these extra cost burdens with their efforts to get back to the positive momentum achieved in previous months.”
Ginni Cooper, partner at MHA, said: “Today’s manufacturing PMI has decreased to just below 50, the first time it has fallen to this level since April. This suggests that the sector continues to face multiple challenges particularly related to the economic environment and supply chain issues. The significant uncertainty and a lack of confidence ahead of Rachel Reeves’s maiden Budget and how this would impact business would not have helped to stimulate growth.
“While manufacturers now have certainty around various policies, the question of where growth will come from still looms large. The announcement on Skills England was welcomed by the sector, as the skills shortage is a perennial issue for manufacturers. However, the Chancellor did little to incentivise businesses to employ new people with an increase in employers National Insurance contributions and a rise in the national minimum wage.
“The announcement of the green paper on the Industrial Strategy was again welcomed. However, while it seems that it is being introduced to encourage entrepreneurship and growth, the increase in Business Asset Disposal Relief and changes in Inheritance Tax will have done little to allay the fears of budding entrepreneurs.
“Despite the lack of incentives on entrepreneurship and growth, there will be some stability ahead for the sector as capital allowances have been held.
It seems that there are contradictory messages coming from the Chancellor, but as always, more will be revealed when we see the detail.”
James Smith, co-CEO at A-SAFE, said: “Falling under the 50.0 mark in the manufacturing PMI is worrying, and it’s another bit of unwelcome news for the industry after the contradictory measures announced in the new Budget last week. The government’s policies to boost manufacturing growth need to pull in a single direction, as the positive aspect of support for investment in R&D and innovation was countered by the increase in employment costs, which will undoubtedly impact recruitment, apprenticeships and some investments.
“Higher taxes do not inspire businesses to invest and push growth – they create the opposite effect. Politicians view all businesses as huge multinationals that can afford to be taxed, and fail to understand that higher taxes don’t just impact growth but can affect their survival. Unless the government stops blowing hot and cold with policies that affect manufacturing growth and starts showing that it truly understands the delicate situation we’re in, we risk going into another PMI decline like the one we endured in 2022 and the first half of 2023.”
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