UK manufacturing falls to three-year low

1 June 2012

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1 June 2012 | Kamalpreet Badasha

The UK manufacturing sector slumped dramatically in May with lower output across reported throughout the industry.

The Markit/CIPS UK Services Purchasing Managers’ Index (PMI) for May reported a figure of 45.9, the lowest level for three years. The headline index drop from the 50.2 figure recorded in April is the second steepest fall in its 20 year history. It is also the first time since November that it has gone below the 50 mark indicating contraction.

Production shrunk for the first time in six months in sectors including chemicals and plastics, transport and mechanical engineering. As a result job losses are being reported for the first time in five months.

There was an easing of price inflation due to input costs and selling prices slowing down, but higher costs were reported by companies for food products, timber and transportation. Although index price increases were subdued by exchange rate effects and lower commodity prices. Selling prices increased only slightly as a result of strong competition and weak demand. Purchases are being delayed as companies expect further price reductions in the coming months.

Weak global economic conditions, increased competition and a subdued domestic market have led to a fall in output. Companies completed existing orders due to output slowing down. A third of buyers polled reported a reduction in new orders last month. Export orders also declined for the second month running. Market conditions are “especially tough in mainland Europe” along with a slower order inflows from the US and Asia.

“The sector could well become a drag on the UK economy as it seeks a return to better health,” said David Noble, CEO at CIPS. “After an optimistic start to the year, the economic realities have started to bite causing businesses to reign in their activity and manage their costs more effectively, as uncertainty continues.”

Rob Dobson, senior economist at Markit, said: “Barring a sharp turnaround in June, manufacturing output could fall by as much as 1 per cent in the second quarter, making the sector a drag on the broader economy and raising the risk of the recession extending into mid-year. However, with price pressures easing further in May, there may be a window of opportunity if the Bank of England wants to give industry a monetary shot in the arm.”

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