PMI reveals acceleration of downturn in manufacturing

The latest figures from the Markit/CIPS Purchasing Managers’ Index (PMI) show that the downturn in Britain’s manufacturing sector gathered pace at the start of the third quarter.

At 45.4 in July, down from a revised reading of 48.4 in June, the seasonally adjusted PMI fell to its lowest level since May 2009. Operating conditions are said to have deteriorated in each of the past three months.

Output and new orders both contracted sharply during July, as companies faced weaker demand from domestic and export clients. The decline in production was the steepest for 40 months, with contractions recorded in the intermediate and investment goods sectors. In contrast, output rose slightly at consumer goods producers.

The level of new export business declined for the fourth month running and at the fastest pace since February 2009. The weakness of the eurozone market remained the principal drag on new export orders, although there were also reports of a decline in new business received from Asia.

Average input prices are reported to have declined for the second straight month, with the rate of deflation only marginally slower than June’s three-year peak. Lower purchasing costs were linked to reduced chemical, commodity, oil, metal, paper and plastic prices. Exchange-rate factors were also reported to have lowered the cost of certain imported goods.

In contrast, average selling charges rose further in July. Manufacturers continued to pass on the higher raw-material prices incurred earlier in the year, while a number also moved to protect (or recover) their operating margins.

Manufacturing employment rose slightly for the first time in three months during July. Companies indicated that staffing levels had risen to complete outstanding contracts and as part of planned company expansions. However, the rate of increase was only marginal.

Commenting on today’s report, Philippa Oldham, head of manufacturing at the Institution of Mechanical Engineers, said: ‘These figures are deeply worrying. Government keeps pledging its support for manufacturing but the sector is now shrinking faster than it has done in three years.

‘If government is serious about supporting this industry and rebalancing the economy away from an over-reliance on financial services, then it needs to urgently develop a detailed manufacturing and industrial strategy with the collaboration of industry.

‘More work also needs to be done to help deliver greater capital investment in new production plants, machinery and training,’ she added.

‘The drop of three points in today’s PMI figures will not help lift the ongoing cloud of economic and unemployment uncertainty,’ said Darren Jukes, a partner in PwC’s manufacturing practice. ‘Despite a slight increase in manufacturing employment, which was planned and needed to complete outstanding contracts, the level of new export business has dropped for the fourth consecutive month.

‘What is clear, however, is that the eurozone crisis continues to affect the industry along with the recently reported slowdown in some of the Asian economies. This is being felt across Europe with similar downward results being reported in Spain, Italy and Greece, while France and Germany have suffered the lowest level of manufacturing activity in more than three years.’

Stephen Cooper, UK head of diversified industrials at KPMG, added that manufacturers will have to review their business models and focus on their core businesses. 

‘As the problems in the eurozone rumble on, we would expect demand and output both in Europe and Asia to remain challenging, so manufacturers need to think about investing in long-term growth through innovation, partnerships and new markets for top- and bottom-line growth,’ he said.