UK manufacturing sector continues to shrink

2 July 2012

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2 July 2012 | Kamalpreet Badasha

The UK manufacturing sector continued to contract last month, easing pressure on input prices.

The Markit/CIPS UK Services Purchasing Managers’ Index (PMI) for June reported a figure of 48.6, slightly higher than the three-year low of 45.9 recorded in May. But the index remained below the neutral mark of 50 for the second month in a row, indicating a contraction in the sector. The average PMI reading for April, May and June was 48.2, which was the weakest since the same period in 2009.

But lower costs for chemicals, energy, food products, metals, packaging, plastics and transportation led to average input prices falling at the fastest pace for over three years.

“The significant reduction of input prices was a silver lining for the sector, as businesses tried to claw back some of the margins lost in previous months,” said David Noble, CEO at CIPS. “The concern for the near future is the spare capacity reported by manufacturers, which could lead to job losses in the coming months unless there is a pick-up in orders.”

Manufacturing production remains subdued as a slight increase in June was due to backlogs being cleared. New order intakes fell further as clients failed to commit to new spend, resulting in a drop of incoming new business for the third consecutive month. This was attributed to a weak global market as demonstrated by the Eurozone crisis affecting export orders and slower economic growth in the US and Asia, which lowered overseas demand.

Companies protected margins by increasing average selling prices, reflecting the input cost rises seen earlier this year. However, SMEs were not able to raise prices as much as large manufacturers. Employment fell for the second month in a row, illustrating weak market demand, redundancies and hiring freezes.

Rob Dobson, senior economist at Markit, said: “On one hand, the increase in production in June provides hope that the wheels have not fallen off the manufacturing economy and, in particular, we are seeing some resilience from the consumer goods sector, which corresponds with recent brighter news on domestic retail sales in the second quarter.”

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