UK manufacturing downturn deepens as demand declines

·Business Reporter, Yahoo Finance UK
·3-min read
Workers in UK manufacturing
The decline in UK manufacturing reflected weaker intakes of new work, reduced new export business and shortages of both staff and raw materials, S&P said. Photo: PA

UK manufacturing production suffered its sharpest downturn since May 2020 last month, as demand from both domestic and overseas clients fell.

According to S&P Global's purchasing managers index (PMI) on Thursday, the gauge fell to 47.3 in August, down from 52.1 in July.

It was the first reading below the 50.0 mark since the early months of the COVID-19 pandemic, showing a fall in activity. However, it was still above last week’s flash estimate of 46.0.

Manufacturing production registered a steep decrease during the month, with substantial contractions across the consumer, intermediate and investment goods sectors.

The decline reflected weaker intakes of new work, reduced new export business and shortages of both staff and raw materials, S&P said.

Read more: FTSE 100 hits six-week low as recession fears spook investors

August saw intakes of new work contracts at the quickest pace for 27 months, amid reports of weaker inflows from both domestic and overseas markets.

There was also mention of clients postponing, rescheduling or cancelling agreements due to rising economic uncertainties, recession warnings and component shortages.

Foreign demand also suffered its steepest retrenchment since May 2020, with order intakes from key markets such as the US, the EU and China all decreasing.

Port congestion, supply chain issues, Brexit complications and inflationary pressures also contributed to the latest contraction of new export business.

Jobs growth ground to a near standstill pace, the data showed, the weakest during the current 20-month sequence of increase. Cuts at small- and large-scale producers also offset a solid increase at medium-sized manufacturers.

Watch: How does inflation affect interest rates

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “The inflationary clouds that have been building over the UK manufacturing industry have finally burst, with a dramatic fall in demand creating the sharpest reduction of new orders since May 2020.

“But there is a glimmer of hope that increasingly robust global supply chains could be key to halting rising prices.”

In addition to this, there were reports of recruitment difficulties such as skill shortages and a competitive hiring market, employees leaving for better paying jobs and capacity being cut in line with reduced new order intakes.

S&P added that business optimism slumped to a 28-month low in August, amid rising concerns about a possible UK recession, strong inflationary pressure and the potential impact of the cost of living crisis on consumer demand.

However, 46% of manufacturers still expect output to rise over the coming year.

Read more: New PM’s term in office to be marked by deepest living standards squeeze in a century

Meanwhile, input costs rose at an above survey-average pace again, albeit the weakest since November 2020. There were reports of rising costs for commodities, containers, electronics, energy, packaging, raw materials and transportation.

“Passing higher input costs on to customers is becoming increasingly difficult in this landscape, and the cost of borrowing is hard to manage,” Rebecca Shalom, UK head of manufacturing at KPMG, said.

“Faced with a multitude of cost pressures alongside rising inflation, manufacturers are increasingly searching for efficiencies or delaying investments.

“And some, particularly those who are energy-intensive, will be increasingly concerned about how long they can withstand these pressures.”

Watch: What is a recession and how do we spot one?