Are factories experiencing a V-shaped recovery?

1 September 2020

Manufacturing production increased at the fastest rate in six years, driven by re-opening following the lockdown, according to the latest PMI.

The rise in output was underpinned by the quickest acceleration in new orders since 2017, with the biggest growth seen from intermediate goods.

The IHS Markit/CIPS UK Manufacturing Purchasing Managers' Index climbed to a 30-month high of 55.2 in August, up from 53.3 in July. It has been above the neutral 50.0 mark for three consecutive months.

Duncan Brock, group director at CIPS, said the sector could be experiencing “a V-shaped recovery” as manufacturing grew at the fastest pace since May 2014.

The improvement in production reflected expansion across consumer, intermediate and investment goods sub-sectors, with the domestic market the prime source of new contracts, according to the PMI. Investment goods producers experienced the lowest growth rate.

New export orders rose moderately for the first time in 10 months, and respondents highlighted improved demand from the EMEA region, North America and Australia.

While the sector has seen positive change, manufacturing employment figures remain “the elephant in the room”, with job losses recorded for the seventh successive month and employment falling at one of the steepest rates during the past 11 years. 

Stockpiles fell further as firms aimed to control costs and finish business delayed by the lockdown, while purchasing activity increased moderately. 

Firms found that in August input inventories dropped, and price inflation jumped to a 20-month high. These cost increases were associated with a lack of available production materials and supply chain disruption caused by the pandemic, as well as exchange rates and increased freight costs. Disruption resulted in longer vendor delivery times.

Business optimism around output growth remained positive, with figures close to July's 28-month high. Expectations aligned with hopes of returning to normal operating conditions, the launch of new products, and the ongoing reopening of the domestic and global economies.

Brock said: “Domestically, customers are playing their part in the recovery of the UK economy, with an upswing in new orders accelerating to the fastest rate since November 2017. A smidgen of good news from overseas too with a small uplift in export orders for the first time in almost a year as optimism across the board was maintained that business could only get better. 

“However, amidst this positivity the elephant in the room remains the poor employment figures. The drop in job numbers in August makes this feel more of a rebalancing strategy than real recovery. Companies are looking at how to stay in business for the rest of the year as challenges from the pandemic retreat a little only to be replaced by an imminent Brexit.”

Rob Dobson, director at IHS Markit, said: “Companies report that the current bounce is mainly driven by the restarting of manufacturers’ operations and reopening of clients as Covid-19 restrictions continue to be relaxed. Backlogs of work fell at an increased rate, hinting at spare capacity, and the labour market remains worryingly weak, with job losses registered for the seventh straight month. 

“The downturn in employment may have further to run as the government’s furlough scheme is phased out unless demand rises sharply. Given the fragility of demand and uncertain outlook, both in terms of Covid-19 and Brexit, policymakers may struggle to prevent a surge-then-slump scenario from developing.”

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