UK PMI signals deepening manufacturing downturn, falling to lowest level for 6 years

01 July 2019

UK manufacturing output vs PMI June 2019 [Sources - IHS Markit, CIPS, ONS]
UK manufacturing output vs PMI June 2019 [Sources - IHS Markit, CIPS, ONS]

"UK manufacturers reported the steepest deterioration of business conditions for over 6 years in June. Production & employment declined amid an intensifying slump in demand & marked worsening of business confidence", observed Chris Williamson, IHS Markit's Chief Business Economist.

The UK manufacturing PMI dipped to 48.0 in June, its lowest level in over 6 years – a 76-month low. As new orders have contracted, output has been scaled back, reflecting falling business confidence amid ongoing Brexit uncertainty.

Following March's original Brexit deadline extension, the unwinding of earlier pre-Brexit stockpiling activity has continued to reverberate throughout the UK manufacturing sector during June. Already high stock levels at both manufacturers and throughout the supply chain have led to a scaling back of output – and with demand from both domestic and export markets weakening, new order intakes are also falling.

PMI at lowest level for more than 6 years

The IHS Markit/CIPS UK Manufacturing PMI fell from 49.4 in May to 48.0 in June, its third consecutive monthly fall, to its lowest level since February 2013 – as well as the second successive month below the 50.0 'no change' level. The rate of decline was also the steepest seen since early 2013, the first time a back-to-back decline below the 50.0 'no change' level has been observed since that time.

Manufacturing production output fell in June at the fastest pace since  October  2012, contracting at a rate exceeded only twice since the height of the global financial crisis in early 2009. Output 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, global economic slowdown and rising competition all contributed to the decreases in new orders and production.

"At its current level, the output index is consistent with the official measure of manufacturing production falling at a quarterly rate of 1%, or 4% annually", observed Chris Williamson, Chief Business Economist at IHS Markit.

UK manufacturing inventories_purchases vs finished goods June 2019 [Sources - IHS Markit, CIPS]
UK manufacturing inventories_purchases vs finished goods June 2019 [Sources - IHS Markit, CIPS]

Demand from both domestic and foreign markets weakened during June. New orders fell at an even faster rate than output, exhibiting one of the largest declines seen during the past decade, in part driven by a further marked drop in new export orders, which declined for the third straight month and at a rate close to May's four-and-a-half year high. Ongoing Brexit uncertainty and softer global economic growth were the main factors underlying this latest decrease, with specific mention of reduced intakes of new work from the US, mainland Europe and Australia.

Signs of excess capacity

Given the decline in new work, backlogs of work fell sharply as firms ate into previously placed orders to try to sustain production levels, suggesting that output might be cut even further in coming months (in the absence of a revival in new order inflows).

Some of the weakening in demand was linked to a reversal of the Brexit-related stock building that had been evident ahead of a feared 'no-deal' Brexit on 31st March. Such destocking was illustrated by manufacturers' stocks of purchases falling for a second month in June, contrasting with the record inventory growth observed earlier in the year.

Stocks of finished goods, in contrast, continued to rise (although the rate of growth was down sharply from earlier in the year) – but this was likely linked to current production exceeding weaker than expected sales, pointing to lower output volumes in coming months. The forward-looking order-to-inventory ratio also fell sharply in June, down to its lowest for seven years – and the second-lowest since February 2009.

UK manufacturing order-to-inventory ratio vs PMI June 2019 [Sources - IHS Markit, CIPS, ONS]
UK manufacturing order-to-inventory ratio vs PMI June 2019 [Sources - IHS Markit, CIPS, ONS]

Steep falls in investment & intermediate goods orders

"Looking further into order book trends," explained Chris Williamson, "Rising demand for consumer goods contrasted with steep falls in orders for investment goods (such as business equipment and machinery) and intermediate goods (manufactured goods supplied as inputs to other firms)."

The intermediate goods sector was the worst affected by the downturn, experiencing the steepest drops in output and new orders of the industries covered by the survey – the sharpest in orders since July 2012. Investment goods also saw contractions, with the rate of decline in new orders especially marked – the largest since November 2012. According to Williamson: "Both declines were linked to falling domestic and export demand (though export orders for consumer goods also fell). The decline in exports for intermediate goods was also, in part, blamed on EU customers shifting to EU suppliers outside of the UK." Meanwhile, although the consumer goods sector eked out further growth, rates of expansion in output and new work suffered sharp slowdowns.

Job losses as optimism slides lower

Business optimism dipped to its third-lowest level in the series history during June. Companies consequently cut headcounts on average for the fifth time this year – and the third straight month in June (albeit to a lesser extent than in the prior two months), concerned about the need to keep costs down in the face of falling order books and an unwanted build-up of unsold stock.

The trimming of headcounts also reflected growing concern about the business outlook. Firms' expectations of future output growth sank sharply in June – to the third-lowest seen since comparable data were first available in 2012.

UK manufacturing order books_new orders vs backlog June 2019 [Sources - IHS Markit, CIPS]
UK manufacturing order books_new orders vs backlog June 2019 [Sources - IHS Markit, CIPS]

Job losses were seen in both the intermediate and investment goods sectors, with reduced staffing reflecting 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.

Deteriorating outlook

The increased rate of decline signalled by the June PMI looks likely to intensify further in July, given the worsening forward-looking indicators of business expectations and the order-to-inventory ratio. Anecdotal evidence from the survey reported an intensifying weakness of global demand, often linked to trade wars, but exacerbated by rising concerns over Brexit. A shift to destocking, after the Brexit-related inventory stockpiling seen earlier in the year, has also added temporarily to the slowdown – but so has a potentially longer-term structural shift in supply chain sourcing by EU companies away from the UK.

Rob Dobson, Director at IHS Markit, which compiles the survey commented: “The downturn in UK manufacturing deepened during June, as the impact of firms unwinding stockpiles built before the original Brexit date continued to reverberate through the sector and exacerbate weak demand. This led to solid decreases in both production and new orders, which sank the headline PMI to its lowest in almost six-and-a-half years.

“Demand from the domestic market weakened, while the additional constraint of slower global economic growth meant new export business fell at one of the fastest rates since late-2014.

“Although the consumer goods sector was able to eke out further output growth, its rate of expansion slowed sharply. Solid contractions at intermediate and investment goods producers also suggested that businesses were cutting back on both day-to-day and capital spending in increasing numbers.

UK manufacturing new orders by product type_investment vs intermediate vs consumer - June 2019 [Sources - IHS Markit, CIPS]
UK manufacturing new orders by product type_investment vs intermediate vs consumer - June 2019 [Sources - IHS Markit, CIPS]

“The stranglehold of sustained Brexit-related uncertainty and disruption also weighed heavily on business confidence and employment, as optimism ebbed to one of its lowest levels in the survey history and staff headcounts were reduced for the third straight month.

“There will need to be a substantial improvement in economic conditions at home and overseas, alongside reductions in both Brexit and domestic political uncertainties, if manufacturing is to see a sustained revival in the coming quarters.”

Duncan  Brock, Group Director at the Chartered Institute of Procurement & Supply (CIPS) added: “The manufacturing downturn is deepening, with a second month in contraction and production shrinking at the steepest rate for seven years. The triple whammy of the Brexit-delay fallout, weaker domestic and export demand impacted on new orders, optimism and job creation, and the sector was left gasping for breath.

“With clients starting to unwind pre-March Brexit stockpiles, new orders from domestic and export markets failed to materialise, as the global economy also slowed down. Companies resorted to job losses to reduce the slack in production capacity, as employment fell for the third month in a row.

“A small silver lining for the sector, arrived in the form of a weaker rate of average input price inflation compared to the last couple of years, and businesses tried to claw back some of the margins lost in previous months by increasing their own prices. 

UK manufacturing analysis of reasons for lost order_anecdotal wordcloud from interviews - June 2019 [Sources - IHS Markit, CIPS]
UK manufacturing analysis of reasons for lost order_anecdotal wordcloud from interviews - June 2019 [Sources - IHS Markit, CIPS]

“The sector’s strength is slowly slipping away, deprived of the oxygen of a reduction in Brexit  uncertainty and an associated return of confidence to the marketplace. All the signs from the manufacturing sector point to another decline next month unless someone pulls a rabbit out of the Brexit hat.”

Commenting on today’s PMI data, Seamus Nevin, Chief Economist at Make UK, the manufacturers’ organisation, warned: “Today’s data proves that May’s plunge below the 50-threshold was not just a one-off with UK manufacturing activity collapsing to its lowest level in six and a half years. Businesses are cutting back on both day-to-day and capital spending with the contraction in output a reflection of growing Brexit uncertainty and, worsening global trade winds.

“Ominously, the PMI’s output measure dropped to 47.2 from 50.3 in May, the biggest contraction in a single month since October 2012. Firms are reporting that export demand is falling month-on-month, as customers around the world are losing confidence in the future of the UK market.

“Looking ahead the picture shows little sign of improvement with signs of weakness now spreading across the Eurozone. Given this outlook, increasing competition to see who can race to the bottom and act tough on ‘no-deal’ is the height of irresponsibility with zero understanding of the consequences.”

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