Manufacturing PMI hits five-and-a-half-year low

3 min read

The IHS Markit/CIPS Purchasing Managers' Index (PMI) fell to its lowest point since February 2013 in June, as the sector continues to unwind from its pre-Brexit stockpiling earlier in the year.

At 48.0 in June, down from 49.4 in May, the headline seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell for the third consecutive month. The PMI has posted below the no-change mark for two months in a row, the first back-to-back declines since early-2013.

Manufacturing production contracted at the fastest pace since October 2012. Output was lowered in response to reduced intakes of new business, which fell to the greatest extent for almost seven years. There were reports that high stock levels, ongoing Brexit uncertainty, the economic slowdown and rising competition all contributed to the decreases in new orders and production.

Demand from domestic and foreign markets weakened during June. New export orders declined for the third straight month and at a rate close to May's four-and-a-half year high. Softer global economic growth and continued Brexit uncertainty were the main factors underlying the latest decrease. There was specific mention of reduced intakes of new work from the US, mainland Europe and Australia. The intermediate goods sector was the worst affected by the downturn, seeing the steepest drops in output and new orders of the industries covered by the survey. Investment goods also saw contractions, with the rate of decline in new orders especially marked. Although the consumer goods sector eked out further growth, rates of expansion in output and new work suffered sharp slowdowns.

Business optimism dipped to its third-lowest level in the series history during June. That said, a number of companies still maintain a positive outlook. Almost 44% forecast that output will be higher in one year's time, compared to only 14% expecting a contraction. Hopes of a recovery in the autos sector, new product launches, planned growth and higher exports were all mentioned as factors underlying confidence. Brexit uncertainty and softer global and domestic economic growth weighed on some firms' outlooks.

Employment fell for the third straight month in June, with job losses seen in the intermediate and investment goods sectors. Reduced staffing reflected lower workloads, economic slowdown, Brexit uncertainty and hiring freezes. Backlogs of work fell at one of the fastest rates for six-and-a-half years. June saw a further increase in stocks of finished goods, although the rate of growth was down sharply from earlier in the year. Inventories of inputs meanwhile fell for the second month running, reflecting the depletion of Brexit stockpiles and reduced purchasing activity.

Expert comment:

Atul Kariya, head of manufacturing & engineering, MHA MacIntyre Hudson: “The continued downward trend of the index is not unexpected, given the lack of Brexit progress since last month’s previous low. The lack of clarity surrounding the UK’s exit from the European Union continues to bring uncertainty that is heavily impacting the commitment of firms and their customers to making investments and placing major orders. This uncertainty, coupled with the fall in stockpiling that had propped up the index in previous months, is taking its toll on the industry – and you only need to look at the struggling car manufacturing sector for evidence of this.”

Mike Thornton, head of manufacturing, RSM: "Although its worrying to see the PMI index slip again this month to its lowest level since February 2013; it isn’t surprising when you look at other leading manufacturing nations. Whether it’s Germany, the US, China or globally, we’ve started to see a slowdown as each market has entered a period of contraction. So, while manufacturers benefitted from a strong start to the year due to businesses and households pulling forward purchases ahead of the original Brexit deadline; we could now see slower growth, which could signal a period of recession across the sector globally. Although the decline in activity is being seen across the globe; in the UK, Brexit and the uncertainty it brings is impacting the industry regarding investment. Only last week, Vauxhall confirmed it would build the next generation of the Astra model in Ellesmere Port if we avoid a no deal Brexit – highlighting the real need for clarity to boost the sector."

Lee Collinson, head of manufacturing, Barclays: “A further drop in the PMI headline figure shouldn’t really come as any great surprise this month as the stockpiling that took place earlier in the year continues to unwind. Not only have manufacturers had to grapple with a prolonged period of uncertainty around Brexit, which has clearly impacted and delayed much needed investment decisions, but they also find themselves in the crosswinds of weakening demand from both home and overseas markets. With production and new order flows falling last month, the sector is increasingly looking to Westminster for the clarity they crave on the future relationship with the EU.”

Andrew Symms, head of energy and industrial manufacturing, DWF: “The May manufacturing PMI figures illustrate the impact of global trade tensions and Brexit uncertainty that has resulted in the PMI to drop below the neutral 50.0 benchmark for the third consecutive month to its lowest level since February 2013. The underlying data is unfortunately pretty dark. Manufacturing production contracted at the fastest pace since October 2012 and new order inflows deteriorated from both domestic and overseas sources. Employment also fell for the third straight month in June. A lack of transparency caused by Brexit ambiguity is holding back investment. Manufacturers need to take positive steps to understand their supply chains, mitigate risks and ensure, to the best of their ability, that financing is available in case conditions deteriorate further.”