Factory output drop should 'make business leaders take notice'

Will Green is news editor of Supply Management
1 August 2022

UK manufacturing output has contracted for the first time in two years due to factors including difficulties sourcing components and transport delays.

The S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index dropped to a 25-month low in July of 52.1, down on 52.8 in June and against the no-change reading of 50.

The contraction mainly reflected downturns in the consumer goods and intermediate goods sub categories, linked to reduced intakes of new work and weaker market demand, as well as sourcing and transport issues.

Foreign demand fell for the sixth month in a row amid reports of weaker inflows from mainland Europe, partly due to Brexit issues, the US and China.

However the data showed further signs that cost inflation and supply chains have passed their peaks. Vendor lead times lengthened to the least extent in almost two years and average input prices rose at the weakest pace since January 2021.

Chemicals, electronics, energy, food products, fuels, metals, packaging, timber, and transporation were among the inputs reported to have increased in price. The war in Ukraine, exchange rates, and global inflationary pressures were blamed.

Stocks of purchases and finished goods continued to rise despite reduced input buying as firms moved to protect cash flow.

Business optimism was unchanged from June’s two-year low, with expectations of contraction linked to weak market confidence, recession fears, and the cost of living crisis.

Rob Dobson, director at S&P Global Market Intelligence, said: “With the Bank of England implementing further interest rate hikes to combat inflation, the outlook is beset with downside risks. With this in mind, the continued low degree of optimism among manufacturers is of little surprise. 

“It wasn't all bad news though, with further signs that cost inflation at manufacturers and supply pressures are already passed their respective peaks. Accelerated job growth as companies address staff shortages was also a plus, although may be at risk if the downturn becomes more entrenched over the coming months.”

Duncan Brock, group director at CIPS, said the output drop “should make business leaders and policymakers sit up and take notice”.

“A reduction in the level of new orders from domestic customers clearly showed that the pressure of cost of living rises for basics such as fuel and energy made consumers think twice about non-essential purchases,” he said.

“The appetite for overseas orders were similarly affected by challenges in global economic growth, disruption in supply, transportation and customs inefficiencies at ports where order levels from the US and China fell back. Even a further easing of supply chain pressures was not enough as lead times continued to be a trial of endurance at historically high levels.”

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