Cost of living crisis hits June manufacturing PMI

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Business optimism hit a two-year low as the slowdown in the UK manufacturing sector continued, according to June's S&P Global/CIPS UK Manufacturing Purchasing Managers' Index (PMI).

June's PMI figures indicate a continuing decline in business output. Sources: S&P Global, CIPS, ONS
June's PMI figures indicate a continuing decline in business output. Sources: S&P Global, CIPS, ONS

June's Index saw output growth grind to a near-standstill pace and new orders contract for the first time in 17 months. Business optimism dipped to its lowest since May 2020, as the number of firms expecting production to rise over the coming year fell to 47% (from 55%
in May). The seasonally adjusted PMI fell to a two-year low of 52.8 in June, down from 54.6 in May. The PMI has remained above the 50.0 mark - indicating growth - since June 2020.

Manufacturing production rose for the 25th consecutive month, but the rate of expansion was the weakest during that time, with several sectors, most notably the consumer goods sector, registering a marked downturn in output.

June saw intakes of new work decline for the first time since January 2021. Companies indicated that the weaker economic outlook, reduced new export order intakes, slower growth of domestic demand, the war in Ukraine, raw material shortages and the slowdown in  China all contributed to the reduction in new work received.

Similarly, new export orders saw a decline in June, contracting for the fifth consecutive month. Again, geopolitical situations such as the Ukraine conflict and Chinese slowdown contributed, while some companies indicated Brexit-related difficulties had impacted orders from the EU.

These factors contributed to a significant weakening of business optimism in June. Firms raised concerns about flat domestic demand, weaker export markets, inflationary pressure, the effect of the increased cost of living on consumer demand and supply chain issues.  Positive sentiment fell to its lowest since May 2020, but companies still expect output to be higher (on average) one year from now. 

Industry reaction

Simon Jonsson, UK Head of Industrial Products at KPMG: “The cost of living crisis is impacting UK manufacturers, slowing new order growth overall, with demand decline more acute for producers of certain goods. Raising consumer prices further in this landscape risks not only slowing consumer sales, but flat-lining them. Manufacturers will find it even tougher to absorb rising energy, fuel and wage costs, without passing them on.  This is a hard dilemma for any manufacturer to solve."

Huw Howells, head of manufacturing and industrials at Lloyds Bank Corporate & Institutional Banking: “For the time being at least, the overall situation is relatively calmer for larger manufacturers as they benefit from generally strong order books and few signs of delay or cancellations at this stage. However, new demand is weakening and if this continues it will make the coming months more and more challenging.
“The reopening of China from its zero-tolerance lockdowns has been fitful, and the effects from this will continue to ripple through supply chains for some time. The inflationary pressure of low supply on as yet unfettered demand for raw materials and components shows little sign of abating. On top of this, labour shortages continue to constrain businesses even if they can manage cost and supply issues.
“There is a lag between interest rate rises and their effects, so the impacts of higher borrowing costs have yet to be fully realised. But many manufacturers are mindful of further and sharper increases in the future and are building this into their business plans. With many businesses exploring financial solutions to make their operations more efficient, this offers some hope that the opportunity to prepare and adjust will create resilience should the trading environment become tougher.”

Maddie Walker, managing director at Accenture, Industry X: “As inflation, and costs of fuel, raw materials, rent and staffing reach fresh highs, manufacturers will be focused on finding ways to keep their costs down. Meanwhile, consumer spending cutbacks will likely grow, subduing demand. Across the board, business’ optimism and confidence is decreasing, and the industry as a whole will have to take swift action to ease the pressures they are facing. Manufacturers themselves can take some steps to navigate further supply chain uncertainty, such as investing in technology to help build resilience against future shocks and create more efficiency.”