Manufacturing downturn continues for third straight month

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September's S&P Global / CIPS UK Manufacturing Purchasing Managers’ Index® (PMI®) posted 48.4 in September, up from 47.3 in August but below the flash estimate of 48.5, marking the third consecutive month of the Index sitting below the neutral mark of 50.0.

September's figures saw manufacturers reporting a cutback in production in response to declining new order intakes. There was less
positive news on the price front as well, with rates of inflation for input costs and output charges both accelerating. 

Although the rate of contraction in output eased slightly since August, it nonetheless remained substantial overall. Contractions were  registered across the consumer, intermediate and investment goods industries. The steepest decline was at intermediate goods producers, which was also the only sub-sector to see its rate of contraction accelerate.

Manufacturers linked lower production to a reduction in new work intakes. The level of new business declined for the fourth month running, albeit to a slightly weaker extent than in August. Companies faced tougher conditions in both domestic and export markets. There were also reports of expected orders being postponed, or cancelled, due to factors such as rising uncertainty, inflationary pressure and the cost-of-living crisis. 

September also saw new export business contract at the quickestpace since May 2020, with reports of lower demand from the US, the EU and China. Manufacturers faced weak global market conditions, rising uncertainty, high transportation costs reducing competitiveness and longer lead times leading to cancelled orders.

Despite this, manufacturers maintained a positive outlook overall during September: almost half (49%) forecast that their output would be higher one year from now, as planned investments, new product launches and hopes for a calmer economic backdrop are expected to lead to an influx of new contracts. However, the degree of positive sentiment remained subdued overall, amid concerns about market uncertainty, high inflation, the cost of living crisis and the increasing risk of economic recession in both the domestic and global economies.

September saw a further increase in manufacturing employment, as companies reported success in filling existing vacancies. Others noted that capacity had been raised to continue progress towards reducing backlogs of work. Outstanding business fell for the fifth straight month.

Industry reaction

Rob Dobson, Director at S&P Global Market Intelligence: “The downturn in UK manufacturing continued at the end of the third quarter, meaning the goods producing sector looks set to have acted as a drag on GDP. Manufacturers have once again cut back production as new order intakes declined for the fourth successive month. Factories are reporting tough market conditions both at home and abroad. Disappointingly, exports continue to fall despite the more competitive exchange rate.

“With existing headwinds from the cost-of-living crisis likely to be exacerbated by the current volatility in financial markets, growing economic uncertainty and further increases in borrowing rates, the industrial sector is likely to remain in the doldrums during the coming quarter to add to deepening recession risks."

Maddie Walker, Industry X lead at Accenture UK: “Another drop in demand could put manufacturers back into crisis mode. While interventions on the energy crisis have not yet been felt on the balance sheet, the plunge in the pound will raise prices of imported raw materials and may make it harder to rein in sky-high costs and manufacture goods. Firms will be looking to insulate themselves with more technology, like automation and robotics, so they can deliver efficiencies, shorten their supply chains, and boost production. The industry will be ready when business confidence returns, but it’s vital that manufacturers pursue long-term plans for growth as well as survive immediate shocks.”

Dave Atkinson, SME & Mid Corporates head of manufacturing at Lloyds Bank: “It is encouraging to see that contraction in manufacturing has slowed month-on-month, but roadblocks will make a return to growth for the sector challenging in the near-term.

“The weakness of the pound will see the cost of imports go up as raw materials and finished goods cost more. We should also expect to see an increase in exports as our goods become cheaper to buy from abroad, strengthening overseas purchasing power.

“Overall manufacturing businesses are benefitting from the strength of their underlying strategies and balance sheets, meaning that profitability should remain for most. However, there are still firms that expect to end the year making losses.

“The uncertainty in the economy is impacting demand in the sector and while the recent support package for energy bills is welcome, businesses would like longer-term answers. Securing this would help manufacturing businesses face into the challenges of high inflation, which continues to squeeze consumer and business spending, ongoing supply chain disruption and higher lending costs with more certainty.

“Businesses will be looking to the Chancellor’s Budget with interest before making any future decisions about investments.”

Simon Jonsson, UK Head of Industrial Products, KPMG: “The twelve-month plus run of confidence in manufacturing output has come to an abrupt end as everyone has returned from the summer break. Even as late as July the PMI index was relatively healthy and manufacturers were still cautiously upbeat. But the economic headwinds of the ongoing squeeze on consumer demand, inflation, and the early signs of recession, have all combined to reduce confidence. This situation will not be improved by the recent volatility in capital markets.    

“UK manufacturing needs to raise its efficiency to deal with these threats, but raising efficiency will require capital investment.  The risk of significantly higher interest rates in 2023 will increase this challenge.” 

Cara Haffey, Manufacturing and Automotive Leader at PwC UK: “Manufacturers are coping with a head wind of lower orders as well as navigating through the current intense storm of higher input prices. Lower orders are particularly worrying, especially given it’s across the board from the US, the EU and China. Despite the storm, manufacturers remain positive for the future focusing, rightly, on the long term. We continue to encourage manufacturers to invest in decarbonising their businesses and supply chains and to continue their progress on digitalisation."