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Manufacturing PMI signals deteriorating business conditions for
third straight month
Order books fall as export downturn deepens
Job losses mount
Cost pressures fall markedly to lowest since early-2016
UK manufacturers reported the largest monthly fall in production
for seven years in July, with recent order book weakness also
leading to one of the largest culls in factory employment for over
six years. Price pressures meanwhile eased, despite the weakened
exchange rate, as more suppliers offered discounts in the face of
disappointing sales levels.
Production slumps
At 48.0 in July (unchanged on June) the IHS Markit/CIPS UK
Manufacturing PMI® indicated a third successive monthly
deterioration of business conditions, with the rate of decline
continuing to run at the steepest since February 2013.
Output fell in July to an extent not seen since July 2012, and a
rate exceeded only twice1 since the height of the global
financial crisis in early-2009. At its current level, the output
index is consistent with the official measure of manufacturing
production falling at a quarterly rate of 1%, or 4% annually.
New orders also fell sharply, the rate of decline easing
slightly compared with June but remaining one of the steepest seen
over the past decade, fuelled in part by a further severe drop in
export orders. The past three months has been the worst spell for
exports for seven years.
Notably, the trend in new orders remained weaker than production
for a sixth successive month in July, backlogs of work fell sharply
again, and the number of companies reporting an unplanned increased
in inventories due to weak sales rose, all of which suggests that
production cuts could intensify in coming months unless new work
inflows pick up.
Job losses
The order book weakness also meant that companies increasingly
took to cutting workforce numbers. With the exception of February,
the July survey recorded the sharpest drop in factory employment
since early-2013.
The trimming of headcounts also reflected ongoing concerns about
the outlook. Firms' expectations of future output improved in July
but only from a low base in June, meaning the overall level of
sentiment remained among the gloomiest since 2012. Anecdotal survey
replies regarding the outlook were dominated by worries over the
disruptive impact of Brexit and waning economic growth, both at
home and abroad.
Competition pushes prices down
Alongside the cooling pace of manufacturing growth and order
book decline, the survey recorded a further easing of prices
pressures. The PMI's gauge of input costs fell to the lowest since
April 2016, while the index of average selling prices slipped to
the lowest since June 2016.
Although the survey often found import prices to have been
pushed higher by the fall in the value of the pound, which traded
more than 1½% lower against the US dollar than in June over the
latest survey period, manufacturers and their suppliers were
increasingly reported to have competed on price.
Surveyed companies' reasons for lower selling prices included
"competition is increasing, causing us to cut margins to maintain
market share", "competition pushing down prices", "lower worldwide
demand, aggressive pricing from competitors", and "[we are] trying
to be more competitive". Similarly, reasons provided for lower
costs during the month often included signs of a shift to a buyers'
market, such as "suppliers offering discounts", "excess stock in
suppliers' warehouses" and "we are seeing prices reduce as European
demand has slowed after Brexit stocking-up".
Global production downtrend
While Brexit-related uncertainty was commonly cited by PMI
contributing companies as a factor behind the UK's manufacturing
downturn, the international environment has also clearly become
more challenging, and helps explain some of the export loss despite
the more competitive currency following the slide in the value of
the pound. July PMI survey data showed the US 'flash' manufacturing
PMI dropping to the lowest since 2009, and similar weak readings
were seen in both China and Japan, as trade war worries continued
to be cited as having dampened trade flows. However, only the
eurozone saw a steeper rate of manufacturing decline than the UK in
July, largely reflecting a sharper rate of deterioration in
Germany, where slumping global demand for autos and business
equipment appear to have hit exports especially hard.
A boost to growth could again be seen in the lead up to the
scheduled Brexit date on 31st October, as companies (and
households) build safety stocks of items ahead of potential supply
disruptions, as was seen in the first quarter of 2019. However, the
deteriorating international environment suggests that any such
boost will prove short-lived. Even in the event of a 'smooth'
non-disruptive Brexit, UK manufacturers could struggle in the
months ahead and continue to act as a drag on the economy unless
global trade picks up.
Methodological note
The output index is based on companies reporting whether
their production has risen, fallen or stayed the same at mid-month
compared to the prior month. Being based of objective metrics
rather than sentiment, the PMI indicators of output, orders and
employment provide an accurate guide to official manufacturing
data. The PMI also typically outperforms other surveys which are
based on subjective measures such as whether production is above or
below 'normal', or whether order books are 'satisfactory', not
least because the definition of such subjective measures can change
over time (read more in our special paper).
1Steeper monthly declines were recorded in July
2012 and November 2011.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.