UK production falls to three-year low as eurozone crisis worsens

Posted on 1 Jun 2012

Manufacturing output in May plunged at its fastest rate in three years as the persistent global downturn reduced demand for British goods.

Manufacturing activity has made a big contribution to Britain’s second recession in two years, according to the Markit/CIPS Manufacturing Purchasing Managers’ Index for May.

The headline PMI nosedived to 45.9 in May from a lacklustre 50.2 in April, making it the lowest reading in there years (May 2009). Reuters reported that it is also one of the sharpest falls in the PMI’s history.
Markit said the sharp decline in activity reflected the first contraction in manufacturing output in six months.

City analysts had forecast a smaller dip below the 50-point mark – the figure that separates contraction from expansion – to 49.8.

Markit economist Rob Dobson said the manufacturing survey indicated manufacturing could fall by one per cent between April and June, raising the risk of Britain’s recession continuing for a third quarter.
The big drop in factory output, coupled with a shrinking construction sector, piles more pressure on the authorities to respond swiftly to help avert a deeper recession as the euro-zone heads for its next crisis point.

The Bank of England will need to consider more quantitative easing to increase the money supply and encourage borrowing.

The dreadful figures are likely to add pressure on the coalition government to find new ways to boost growth as it remains wedded to its austerity plans. It also led to more calls for a proper industrial strategy.

Dr Colin Brown, engineering director at the Institution of Mechanical Engineers, said: “The UK economy is not rebalancing, it’s unbalancing.

“Manufacturing is shrinking while our services sector is growing and manufacturers across the country cannot see what the Government is doing to help turn this around. We are in desperate need of a high profile industrial strategy that can support our manufacturers through these difficult times.”

On Wednesday at the National Manufacturing Debate, chief executive of the British Chambers of Commerce Martyn Pellew called for government to green light several large infrastructure projects to stimulate growth. He cited the success of DP World’s £1.5bn Thames Gateway project in creating direct and indirect jobs and regenerating the East End of London into an international container port.

Fears over the eurozone, and a heavy fall in demand from the beleagured region, is at the root of the heavy production drop.

“The marked deterioration in European activity and confidence has hit home in May, with customers around the world taking a sharp pause of breath as eurozone events unfold,” said EEF’s chief economist Lee Hopley. “UK manufacturers have been buffeted by mounting economic uncertainty for much of the past year, reflected in extremely volatile indicators of trading conditions.”

The figures are a kick in the teeth for a UK manufacturing sector that had shown so much fight in the last 12 months – but there are still many signs of success and resilience. “The sector is a very varied and agile one and some sectors with longer order books and, a diversified customer base, will not necessarily recognise the declining trends indicated by the survey,” add Miss Hopley.

Head of manufacturing at Barclays, Mark Lee, who defended the banking sector’s support for manufacturers at the Big Debate at Cranfield on Wednesday, said: “Today’s larger than expected fall in the figures is reflective of the headwinds facing UK manufacturers from the first quarter contraction in UK economic growth, along with continued pressure on export demand from the eurozone. Until clarity and confidence prevails, we expect UK manufacturing growth to remain flat at best in the coming months.”

Official data last month showed that the UK is deeper in recession than previously thought, with a fall in GDP of 0.3%.