UK manufacturing takes 'turn for the worse'

3 January 2023

Manufacturers have been warned to expect a “difficult 2023” as output contracted in December at one of the quickest rates since the aftermath of the 2008 financial crash.

The S&P Global/CIPS UK Construction Purchasing Managers’ Index hit a 31-month low of 45.3 in December, down from 46.5 in November. Excluding the series of lows reported in the initial months of the pandemic, this was one of the weakest readings since mid 2009.

The PMI has remained below 50 –  with readings above this marking expansion and those below indicating contraction – for five successive months. 

Manufacturing production contracted for the sixth consecutive month in December, and the rate of decline was one of the steepest seen during the past 14 years. 

Rob Dobson, director at S&P Global Market Intelligence, said: “The UK manufacturing downturn took a further turn for the worse at the end of the year. Output contracted at one of the quickest rates during the past 14 years, as new order inflows weakened and supply chain issues continued to bite. The decline in new business was worryingly steep, as weak domestic demand was accompanied by a further marked drop in new orders from overseas. 

“Clients are increasingly downbeat and reluctant to commit to new contracts, not just in the UK but also in key markets like the US, China and the EU. The weakness in the latter is still being exacerbated by the constraints of Brexit, as higher costs, administrative burdens and shipping delays encourage increasing numbers of clients to shun trade with the UK. The downturn in industry is also increasingly being felt in the labour market, with manufacturers now shedding jobs at the quickest pace in over two years.”

He said there were positive signs as rates of increase in input prices and factory selling prices slowed in December, but warned this is due to weakened demand. “[This] is unlikely to provide much real respite for manufacturers and their operating margins as they head into what looks like being a difficult 2023,” he said. 

Output fell at accelerated rates and companies said this was caused by declining intakes of new work, supply chain disruptions and material shortages. New orders, employment and stocks of purchases also fell.

Rates of new business declined, reflecting weaker domestic and overseas demand, economic uncertainty, client destocking and customers postponing orders, the PMI found. 

John Glen, chief economist at CIPS, said: “New orders dropped at one of the fastest rates in over a decade as overseas customers were put off by Brexit customs requirements pushing up costs and delays and domestic orders were affected by the general pressure from rising prices.

“This knock-on effect meant that manufacturing companies shed more jobs, reducing their operational capacity for work that never materialised at a time when they still struggled to find the right skills and regain normality over their businesses.”

The PMI further found manufacturers passed on increased costs to clients. However, it noted with cost inflation easing, the rate of increase in output charges reached an almost two-year low.

Glen continued: “All these black spots managed to overshadow some of the improvements for manufacturers such as a further easing in supply chain delays or the higher rates of activity in the investment goods sector or input price inflation easing to a two-year low.

“The overarching concerns remain that there is little power in the UK economy’s engine of growth for 2023 and manufacturers were painfully aware of this as business expectations remained at historically low levels again.”

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