UK manufacturing production continues to contract

1 August 2012

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1 August 2012 | Kamalpreet Badasha

The UK manufacturing sector continued to contract as operating conditions deteriorated for the third month in a row.

The Markit/CIPS UK Services Purchasing Managers’ Index (PMI) for July reported a figure of 45.4, its lowest level since May 2009. This is a drop of 3 points from the revised figure in June of 48.4. The index has remained below the 50 mark, indicating no change for the third consecutive month, showing a continued contraction in the sector.

Production declined sharply and there was a sharp contraction in output and new orders as demand from domestic and export clients fell. Export business fell for the fourth month as a result of the ongoing Eurozone market weakness, and a drop in business from Asia. But consumer goods producers saw a slight rise in output.

Rob Dobson, senior economist at Markit, said: “The July PMI survey suggests that the domestic market shows no real signs of renewed life. The announcement of additional quantitative easing and launch of the Funding for Lending scheme are too recent to have had an effect. We wait to see whether these will provide the desired and hoped for support to industry later in the year.”

Input price inflation declined for the second consecutive month. Lower prices for chemicals, commodities, oil, metals, paper and plastics resulted in lower purchasing costs. Some imported goods benefited from lower costs as a result of exchange rate factors. But selling charges increased as manufacturers passed on the higher cost of raw materials, while also recovering or protecting their operating margins.

Employment in the sector increased marginally as companies looked to complete outstanding contracts. Additionally, a third of survey respondents reported a decrease in work backlogs resulting in its sharpest decline since March 2009. The slight increase in employment was also attributed to planned company expansions. Manufacturers have cut back on purchasing, leading to a contraction in input buying volumes. There was reduction in inventory stock and finished goods inventories fell.

“A perfect storm of wet weather and weak confidence in the UK has combined with global economic drift to engulf the manufacturing sector in July, said David Noble, CEO at CIPS. “A slight increase in employment is the thinnest of silver linings for the sector, along with lower input prices and further growth in the consumer goods industry.”

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