The UK manufacturing sector witnessed continued solid expansion in September, with both output and new orders continuing to rise, new figures released this morning show.
According to the S&P Global UK Manufacturing Purchasing Managers’ Index™ (PMI®), the UK manufacturing sector saw a further solid increase in production volumes at the end of the third quarter. Output and new orders both continued to rise, as the domestic market remained the main propeller of growth. There were signs of a wait-and-see approach entering decision-making, however, with the forthcoming Autumn Statement in particular leading to slower gains in both production and new business and a dip in future expectations to a nine-month low.
The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index™ (PMI®) posted 51.5 in September, down from August’s 26-month high of 52.5 and unchanged from the earlier flash estimate. The PMI has remained above the neutral 50.0 mark for five successive months, signalling continued expansion.
In contrast, Eurozone manufacturing experienced its steepest production decline this year to date.
The HCOB Eurozone Manufacturing PMI fell to 45.0 in September, from 45.8 in August, signalling a marked and accelerated deterioration in the health of the euro area’s goods-producing economy.
Speaking about the Eurozone numbers, Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, said: “It is a real shame that Spain is only the fourth-largest economy in the eurozone. While handling the global manufacturing downturn surprisingly well, Spain just does not have enough weight to lift the rest of the eurozone with it. The worsening industrial slump in Germany, for example, is too big for Spain’s momentum in September to make much of a difference”.
Germany’s ongoing contraction is being attributed to the “China shock”, with manufacturers having not found an answer to the sudden intensification of competition.
Consumer and intermediate goods sectors driving demand
Three out of the five PMI sub-components – output, new orders and suppliers’ delivery times – were at levels consistent with improved manufacturing operating conditions. In contrast, levels of employment and stocks of purchases both declined, as manufacturers looked to mitigate rising input costs by reducing expenditures in other areas.
Manufacturing production rose for the fifth consecutive month in September, as companies responded to improved intakes of new work. The main drivers of the latest expansion were the consumer and intermediate goods sectors, both of which registered stronger increases in output and new business. In a reversal of fortunes, the investment goods sector (which had been the best performing sub-industry in recent months) slipped back into contraction, with production and new work inflows contracting for the first time in five months.
September data signalled a further decrease in incoming new export business, the thirty-second in as many months. UK manufacturers reported that subdued market conditions in Europe were the main factor weighing on overseas demand, with France and Germany the principal concerns. Lower demand from US clients was also cited.
There were signs of rising uncertainty at manufacturers and their clients impacting on a number of variables in September. Along with the mildly slower rises in new orders and output compared to August, there was also a sharp easing in the level of confidence regarding future production trends. Cuts to employment, purchasing activity and stocks at manufacturers also pointed to rising cost-caution.
Business optimism subsequently dropped to a nine-month low in September. Moreover, the month-on-month decline in the Future Output Index from the survey (7.5 points) was the second-steepest on record, beaten only by that registered in March 2020 (13.1 points).
There were reports that uncertainty relating to possible changes in government policy (largely centring around October’s Autumn Budget) and subdued global market conditions were weighing on UK manufacturers’ outlook for the coming 12 months. On the plus side, half of those surveyed (50%, down from over 60% in August) still expect output to rise over the coming year, citing new projects, marketing efforts and planned new product launches as reasons to remain optimistic.
Manufacturing employment declined in September, following back-to-back increases in the prior two months. Lower staffing reflected cost reduction initiatives and a more cautious approach from companies amid rising uncertainty about the likely future path for demand. Purchasing activity was also cut back further as a result.
September saw average input prices rise at the quickest pace since January 2023. A wide range of materials were still reported as up in price, many of which as a result of increased freight prices. Part of this was due to the re-routing of supply chains away from the Red Sea, which also led to a lengthening of lead times from suppliers for the ninth month in a row. Higher costs were passed on to some clients in the form of increased selling prices.
‘Manufacturers more nervous about the outlook’
Rob Dobson, Director at S&P Global Market Intelligence, said: “The UK manufacturing sector is still expanding at a solid, albeit slightly slower, pace. Output rose for the fifth successive month in September, underpinned by a resilient domestic market.
“However, manufacturers have become more nervous about the outlook, suggesting that the current spell of impressive growth is fading, with business optimism about the year-ahead slumping to a nine-month low. The extent of the drop in confidence was striking, beaten only by that seen in March 2020 prior to COVID lockdowns. Uncertainty about the direction of government policy ahead of the coming Autumn Budget was a clear cause of the loss of confidence, especially given recent gloomy messaging, though firms are also worried about wider global geopolitical issues and economic growth risks.
“Price pressures are also becoming a more prominent feature of the survey and a reminder that the inflation genie is not yet back in the bottle. Input cost inflation accelerated to a 20-month high, leading manufacturers to further push up their selling prices. Freight cost rises are a big factor underlying the resurgence in the price measures, as supply chains continue to feel the strain of the Red Sea crisis and global conflicts.”
Industry reactions to August PMI
Maddie Walker, Industry X lead for Accenture in the UK, said: “The UK’s manufacturing sector continues its positive trajectory on the road to recovery, though the easing in growth may be a sign that manufacturers are in a holding pattern. While manufacturers have responded to improving economic conditions and customer demand, overall business confidence has slumped. To pursue growth, manufacturers can move from cautionary cost management to transforming their organisations with industrial AI, and other technologies, to relieve cost pressures, improve operations, and boost their people’s productivity.”
Cara Haffey, Leader of Industry for Industrial Manufacturing and Services at PwC UK, said: “The UK manufacturing sector appears to be showing a considerable level of confidence in market conditions, with September’s PMI reading of 51.5 the fifth consecutive month that the sector has now shown growth. The domestic market remained the main growth proponent, with the PMI noting that output, new orders and suppliers delivery times were each signalling healthy sector conditions.
“It is clear that manufacturers will be hoping for some certainty and clarity around business policy from this month’s Autumn Statement. Current levels of uncertainty are perhaps reflected in the PMI’s optimism ranking dropping to a nine month low, with manufacturers currently unable to forecast and plan without knowing what the business policy landscape will be before the 30th October.
“There are still challenges being faced for exports, not least with lessened demand from key European markets such as France and Germany as well as US clients, reflected in incoming new export business decreasing for another consecutive month. With supply chains continuing to be rerouted along key logistics routes in the Red Sea – it seems that agility and adaptability will continue to be key. Building back export sales will need to be a key focus for the government if they want to firmly deliver on their UK growth ambitions.”
Chris Barlow, head of manufacturing at MHA, comments on today’s S&P PMI manufacturing data: “Today’s manufacturing PMI data shows a slight decrease in activity, which was expected by the market and reflects what we are hearing on the ground from our clients. Substantial challenges still remain for the sector as we head into the autumn, but the sector is now on a more solid footing.
“While interest rates are on a downward trajectory, the cut is unlikely to have had a major impact on the sector just yet. Rates are high in comparison to many other major markets and there is uncertainty around when the next cut may happen, impeding manufacturers desire to spend or invest.
“The government’s recent announcement on the increase in public sector wages will also be playing on the minds of private sector employers. If there is yet another hike in the minimum wage in this month’s Budget, questions will be asked how and will they be able to pass the costs on.
“On the other hand, the announcement of a new Industrial Strategy is certainly welcome news for the sector; however, as always, the devil will be in the detail. Whether an existing minister is chosen to lead the strategy or there is a new minister for manufacturing, the strategy needs to be actioned and pushed forward. The issues of skills, supply chain challenges and R&D also need to be addressed.
“The reforms announced to the apprenticeship systems will certainly help to alleviate some of the skills challenges the sector is facing. However, we will have to wait and see if this is going to achieve the desired results.
“Now is not the time for short-term incentives but long-term planning that encourages the manufacturing sector and incentivises investment from abroad.”
Boudewijn Driedonks, partner at McKinsey & Company, commented: “Business confidence took a hit in September, both in the UK and in the Eurozone.
“September took the steam out of the UK’s manufacturing’s recovery. But while growth slowed slightly to 51.5, it remains above the crucial 50 mark. Resilient domestic growth combined with reduced spending is helping offset weak overseas demand. However, a sense of caution is bubbling beneath the surface, with manufacturers holding back on spending, including lower staffing and reduced stocks.
“In the UK, price pressure seems to be on the rise, with increases in materials and freight, which is being passed on to customers. Uncertainty surrounding potential market changes, coupled with concerns about the UK’s ability to withstand declining exports, may have contributed to the drop in business optimism to a nine-month low.
“The momentum we had started to see in parts of the Eurozone was also brought to a standstill. The PMI fell to 45.0, the lowest reading of 2024 so far. The contraction was particularly pronounced in the manufacturing powerhouses of France and Germany where output, new orders and exports experienced a rapid decline. Additionally, the southern countries experienced a slowdown in growth. Spain and Greece are now the only countries notably above the neutral line of 50, with a PMI of 53.0 and 50.3 respectively. With annual inflation in France and Spain already below the ECB’s 2% target, this decrease in manufacturers’ output pricing is another key data point to watch closely. However, a single month’s data may not provide enough information to draw clear conclusions.”
Christine Hart, Legal Director within the Manufacturing and Supply Chain sector team at independent purpose-led law firm Brabners, said: “Another month of output growth bookends a positive summer for UK manufacturers that has seen order books expand and operating conditions continue to improve – putting the sector on its strongest footing since the pandemic.
“However, with export markets remaining sluggish and European counterparts struggling in the face of limited demand, the importance of domestic confidence is clear. All eyes will therefore be on the upcoming Autumn Budget, which is set to be accompanied by long-awaited detail on the government’s proposed industrial strategy.
“While anticipation builds over what the strategy will entail, manufacturers can bank on the government reiterating its focus on harnessing innovative technologies such as additive manufacturing and AI. The businesses that proactively track the fluid regulatory landscape accompanying these innovations will be best placed to benefit from their increasing adoption.”
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