Two-year slowdown predicted, but optimism continues amid continued pricing pressures
Manufacturing is still growing in the UK and EU, as shown in the latest IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Indices (PMI) posting 52.8 and 54.6 respectively for the month of August. However, activity in the sector has slowed to the lowest rate for around two years, amid sliding business confidence and concerns about global economic recovery.
The UK figures are at the lowest for more than two years: with employment in the UK manufacturing sector slowing almost to a standstill and optimism also dipping to near two-year lows. New orders and output slowed and new export orders eased, after having increased month-on-month for the past two-and-a-half years, thanks in part to a weaker Pound. Slowing output and new orders have also led to a lull in jobs growth for the sector.
New order growth in the EU is at the weakest rate for two years, with European manufacturers also experiencing a slowing of export trade across Germany, Spain, and Italy. Meanwhile, France experienced only slight growth in new export orders. In contrast to the UK, however, employment continued to recover, with notable increases in fresh jobs growth for Germany and the Netherlands.
While the sector retains some of its optimism, with 47% of UK manufacturers surveyed expecting increased production in the coming year, this vote of confidence is at the lowest for almost two years. Optimistic manufacturers cited planned new investment and products, along with anticipated growth in new export orders and increased capacity on the horizon. This was balanced with a number of firms voicing Brexit and exchange rate concerns.
Pricing pressures remain
Cost pressures remain high across the UK and wider EU, with input and output costs increasing at above average rates in the UK and at a slower rate within the Eurozone. Higher costs and shortages of raw materials, higher-priced electrical components and rising fuel costs have all been passed on to clients as increased pricing. This, along with a number of recent transport delays, has created longer vendor delivery times, which have lengthened considerably in August for both the UK and across the Eurozone.
Commenting on the latest reports, David Johnson, founding director of currency specialist, Halo Financial, said: “The ongoing uncertainty surrounding Brexit has finally bitten the manufacturing sector, chipping away at the confidence of an industry that usually displays considerable optimism.
“The practicalities of economic uncertainty, from volatile exchange rates, to increasing costs, are taking their toll, despite slivers of hope for improvement in the year ahead. Any clarity on a UK-EU deal has an immediate positive effect on the value of the Pound, as we saw with Mr. Barnier’s comments last week. These gains are likely to be reflected in both UK and EU industry. Everyone is hoping for some positive realnews, while trying to get on with business as usual. No mean feat, but pragmatism is a very British trait.”
Atul Kariya, partner and head of manufacturing and engineering at business advisors and accountants, MHA MacIntyre Hudson, commented:
“In the face of considerable uncertainty, manufacturers are doing all they can to increase output and orders and explore opportunities at home and away. If you haven’t already, now is the time to take steps to secure sound working relationships across the EU and beyond and shore up plans to guard against risk and protect profits. Getting to grips with pricing challenges and covering rising costs is a key challenge to address before further increases bite.”
Dorrien Peters, head of manufacturing at law firm, Irwin Mitchell, added:
“These results are disappointing, but not surprising, as we are seeing some growth in the sector, but the weight of uncertainty in the UK and across Europe is taking its toll on confidence levels.
“The manufacturing sector generally has been incredibly resolute in recent years and it is vital that this willingness to tackle the challenges that lie ahead continues. There are encouraging signs that many are continuing to invest in new products and hopefully as the commercial environment becomes clearer as we approach Brexit, the levels of growth amongst manufacturers will continue to rise.”