UK Manufacturing PMI: Industry starts the year on the back foot but there is optimism among companies

January’s seasonally adjusted PMI of 47 is higher than the earlier flash estimate of 46.7 and up on December’s 31-month low of 45.3. Nevertheless, it shows how the UK manufacturing industry remains in contraction territory (below 50). The UK Manufacturing PMI has now remained below the neutral 50 mark for six consecutive months.

Manufacturing output and new orders both fell in January, which triggered job losses for the fourth successive month. Low demand, elevated price inflation, scarcity of raw materials and the ongoing skills shortage all compounded the tough situation for UK manufacturers.

But despite the tough operating environment, UK manufacturers are optimistic. Indeed, optimism rose in January to its highest level since April 2022, with companies citing investment opportunities, new projects and products, as well as proactive sales and marketing initiatives. There is also hope among organisations that both domestic and overseas markets will pick up, outlined by the fact that almost 57% of manufacturers said they believed output would be higher one year from now.

Commenting on the latest survey results, Rob Dobson, Director at S&P Global Market Intelligence, said: “UK manufacturers faced a tough operating environment at the start of 2023, leading to reducing intakes of new business, declining production volumes and lower staffing levels. Weak demand at home and overseas, supply chain constraints, strikes and the continuing impact of high inflation all stymied the performance of manufacturers. Weak economic growth in the US, EMEA and across Asia is also dragging down new export wins, exacerbating the strain already caused by port delays and lingering Brexit complications.

“There were some shoots of positivity developing, however. Rates of contraction are generally lower than before the turn of the year, a possible sign that we may be past the worst of the downturn in industry. Cost inflation also eased further, while supply chain delays were the least pronounced for three years. Manufacturers’ confidence is also reviving from recent lows, hitting a nine-month high, though the mood continued to be darkened by concerns about inflation and the possibility of recession.”

Dr. John Glen, Chief Economist at the Chartered Institute of Procurement & Supply, said: “Though January’s results were an improvement compared to the end of 2022, a spate of weak results in employment, output and new orders kept the sector in contraction for the seventh month in a row.

“Buyers cut back purchasing to the joint-greatest extent since May 2020 and there were positive and negative reasons. Declining inflows of new business showed that both domestic and overseas customers either cancelled orders, delayed the decision, or chose to forgo the work altogether. Concerns around a global and a deeper UK recession were cited and manufacturers reined back on job creation, reduced their staff numbers to protect profit margins or were unable to find the right skills.

“The good reason came in the form of improved supply lines that had been struggling since the pandemic but also since Brexit. January saw the least marked lengthening of supplier lead times since January 2020 which may have impacted optimism amongst the makers rising to April 2022 levels.”

David Atkinson, SME and mid corporates head of manufacturing at Lloyds Bank, said: “It’s encouraging to see that contraction is slowing and recent GDP figures signalled unexpected growth. We’re also observing a good amount of liquidity in the sector, with no more firms in financial distress than we would typically see. This is a positive start to 2023, however, it is still early days with mixed economic forecasts creating some uncertainty.

“Nevertheless, some are finding ground for cautious optimism in the months ahead. A change in fortunes is largely down to manufacturers’ stiff-upper-lip mentality and the resilience baked into the sector. Manufacturers managed their costs well during the pandemic, and this has given them a strong buffer against the sharp inflationary pressures they continue to face today.”

Maddie Walker, Industry X lead for Accenture in the UK, said: “It’s a mixed landscape for manufacturers right now. There are signs from across the economy that inflation is easing, however the impact continues to be felt as energy costs and pricing remain well above the average that businesses have gotten used to. Certain industries, such as car production, also continue to be hampered by semiconductor shortages and factory closures. Manufacturers stand the best chance of remaining resilient by continuing to invest in the right people, skills and technologies for the long-term.”

Glynn Bellamy, UK Head of Industrial Products, KPMG, said: “2023 has started with a multitude of challenges for the UK’s manufacturing sector.  The cost of living is impacting consumer demand and subsequent customer orders, a number of input costs have been driven up by inflation, energy costs and interest rates remain heightened, supply chains are still under pressure, plus some firms are experiencing staff shortages and trade friction.

“It will be some months yet until manufacturers feel that the UK economy has turned the corner, but the first small signs that inflation may have peaked increased optimism slightly in January about cost pressures lowering soon and continuing to fall as the year goes on.”

Deloitte’s UK manufacturing leader, James Williams, said: “The PMI Index continues to contract – remaining at a sub-50.0 level. Indications are that the recession in UK manufacturing will continue well into the summer as demand from customers remains weak globally.

“British manufacturers are having to direct their attention and resources to navigating through these difficult times, rather than investing in the opportunities offered by Industry 4.0. This will be crucial to maintaining competitiveness and sustainability in the long term.”