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A rise in the headline flash UK manufacturing PMI masked a
deterioration in the rate of growth of output in October. Although
widely attributed to near-record supply delays and staff shortages,
the worsening production trend could also be linked to a
downshifting of demand growth since the summer, in turn caused
partly by an increasing loss of export orders.
The IHS Markit/CIPS flash manufacturing PMI rose to 57.7 in
October from 57.1 in September. However, dig down into the
components of the PMI and we can see worrying signals about the
health of manufacturing in the UK.
First, the survey's output index - which measures the actual
month on month change in the volume of goods that each factory
produced each month - fell to 50.6 from 52.7 in September. Barring
the pandemic-related lockdowns seen in the UK in the spring of 2020
and early 2021, this is the lowest output index reading since the
start of 2020 and indicative of the official gauge of manufacturing
production falling on a quarterly basis.
Supply constraints limit output
Drilling down into the reasons provided by those manufacturers
who reported a fall in production during October, some 43% reported
that output had been hit by shortages of components or supply chain
delays. These shortages were highlighted by the survey's suppliers'
delivery times index falling further in October, indicating the
greatest lengthening of supply lines since the initial global
factory closures seen at the start of the pandemic. Worst affected
were food & drink producers and manufacturers of electrical and
electronic goods.
A further 15% of respondents reported that output had fallen due
to staff shortages - linked either to illness, COVID-19 confinement
or staff leaving.
Some comfort can be drawn from the fact that production should
recover in these firms once these shortages have eased. Indeed,
backlogs of work rose in October at the fastest rate since June,
reflecting a further marked build-up of orders yet to be completed
or even started. These rising backlogs help explain a slight upturn
in firms' future output expectations.
But new orders and jobs growth has
downshifted
However, more worryingly, almost one-in-three firms (some 29%)
simply reported that their output had decreased due to weakened
demand. Although the survey's new orders index picked up slightly
during the month, it remained far below levels seen in the six
months prior to September, suggesting the UK factory sector has
seen a downshifting of demand growth since the summer.
Although some pull-back in spending on goods was to be expected
as the service sector continues to open up from COVID-19
restrictions, this weakening of demand growth can also be linked to
a second consecutive monthly fall in new export orders during
October, which fell at the fastest rate since the January lockdown.
Analysis of the reasons cited for falling export orders in October
shows that one-in-three firms blamed Brexit.
Note also that, although factory employment growth picked up in
October according to the flash PMI, the latest increase in staffing
levels was the second-slowest since February and - like new orders
growth - was far weaker than the gains recorded during the
summer.
Dimmer outlook
The October survey therefore underscores how the rise in the
headline PMI has masked a deteriorating production trend, albeit
one that should in part be reversed if current supply-side
constraints can be lifted. However, the weakening inflows of new
orders and scaling back of hiring in recent months suggest that the
outlook for manufacturing has dimmed since the summer, which can be
linked to a large degree on falling exports, which are in turn
partly linked to Brexit-related factors.
Chris Williamson, Chief Business Economist, IHS
Markit
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.
