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This DMG DMU 80 eVo Linear Vertical Machining Center was manufactured in the year 2015 in Germany an
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UK manufacturing output growth ‘at near-stagnation pace’

Posted on 01 Jul 2022 and read 884 times
UK manufacturing output growth ‘at near-stagnation pace’The slowdown in the UK manufacturing sector continued at the end of the second quarter, as June saw output growth grind to a near-standstill pace and new orders contract for the first time in 17 months. Business optimism dipped to its lowest since May 2020, as the number of firms expecting production to rise over the coming year fell to 47% (from 55% in May).

The seasonally adjusted S&P Global/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to a two-year low of 52.8 in June, down from 54.6 in May. The PMI has remained above the 50.0 mark since June 2020.

Manufacturing production rose for the twenty-fifth consecutive month in June. However, the rate of expansion was the weakest during the current upturn and performances differed widely across the sector. Consumer goods producers saw a marked downturn in output, while robust expansion was again registered in the investment goods industry.

June saw intakes of new work decline for the first time since January 2021, as companies indicated that the weaker economic outlook, reduced new export order intakes, slower growth of domestic demand, the war in Ukraine, raw material shortages and the slowdown in China all contributed to the reduction in new work received.

The consumer goods and intermediate goods sectors were hardest hit by the decline in new order inflows. In contrast, investment goods producers saw new work rise for the fifth month running. New export orders contracted for the fifth month running in June, mainly reflecting the slowdown in China, rising economic uncertainty, the war in Ukraine and increased competition.

Brexit-related difficulties

Some firms also noted that ongoing Brexit-related difficulties and weaker growth had impacted new order intakes from the European Union (EU). New export business declined in the consumer and intermediate goods industries, and was unchanged in the investment goods category.

The manufacturing slowdown and tougher economic backdrop drained business optimism in June. Firms raised concerns about flat domestic demand, weaker export markets, inflationary pressure, the effect of the increased cost of living on consumer demand and supply chain issues.

Positive sentiment fell to its lowest since May 2020, but companies still expect output to be higher (on average) one year from now. Optimism was linked to investment, growth plans and hopes for a return to a more ‘normal’ economic environment.

Jobs growth was registered for the 18th successive month in June. Increased employment was linked to higher output, staff shortages and efforts to reduce backlogs of work (which fell for the second month running). Staffing levels rose across the consumer, intermediate and investment goods sectors and at small, medium and large-size producers.

Price inflationary pressures remained elevated at UK manufacturers during June. Input costs rose on the back of raw material shortages, stretched supply chains, higher prices for commodities, electronics, energy, oil, paper, plastics and timber (among other items). Higher costs were passed on, in part, to clients in the form of increased selling prices. That said, rates of inflation in both price measures continued to ease.

Meanwhile, purchasing activity increased for the 17th consecutive month in June. Increased demand for inputs alongside ongoing supply chain constraints led to a further marked lengthening of vendor lead times.

Global economic slowdown

Rob Dobson, director at S&P Global Market Intelligence, said: “UK manufacturing output growth ground to a near standstill in June, as intakes of new work contracted for the first time since January 2021. Domestic market conditions became increasingly difficult and foreign demand fell sharply again, stifled by Brexit, transport disruption, the war in Ukraine and a global economic slowdown.

Business confidence took a hit as a result, dipping to its gloomiest since mid-2020. Jobs growth also slowed sharply amid the increasingly uncertain outlook and recent surge in energy costs.

“The consumer goods sector was especially hard hit, as household demand suffered a steep retrenchment on the back of the cost-of-living crisis. There were some welcome signs that supply-chain constraints and cost inflationary pressures may have passed their peaks. However, with these constraints still elevated overall and demand headwinds rising, it is likely that UK manufacturing will see the economic backdrop darken further in the second half of the year.”

Duncan Brock, Group director at the Chartered Institute of Procurement and Supply, said: “The manufacturing sector managed to hold steady last month and remained just above the no-change mark while delivering some sluggish results at the same time. New order levels fell for the first time since January 2021 and interest particularly from export markets faded away for the fifth month in a row.

“Supply chain managers reported that ports and paperwork were their undoing in June with Brexit a thorn in the side of manufacturers combined with weaker domestic demand, inefficient performance in supply chains and an overall shaky UK economy. The consumer goods sector took the brunt of the shortfall overall as the mounting cost of living crisis affected spend for manufactured goods. Job creation remained the one bright spot as businesses played catch-up after lockdowns and disruptions but this is likely to soon reach peak levels without a steady pipeline of work to keep the machines turning.

“As the energy in the sector leeched away, so did optimism which fell to its lowest since May 2020 where only 47% of respondents were hopeful about the next 12 months. The manufacturing sector may not be the biggest in terms of the UK’s GDP contribution, but its importance may become more critical in the coming years and it needs a better trading environment than 2022 has offered so far.”

Less politics and more action

Commenting on the latest PMI, Guy Hodgkinson, partner at MHA, the national association of accounting, auditing and business advisory firms, said: “June’s travel chaos caused by staff shortages at airports and national rail strikes, in addition to the UK’s battles with the EU over the Northern Ireland Protocol has added further woe to an already perilous business environment for manufacturers. As supply chains continue to be disrupted, the sector needs less politics and more action from the Government with a focus on encouraging inward investment to ease distressed trade flows.

“Business confidence has continued to dive due to the inflationary impact on wages and sky-rocketing energy prices. Following the Bank of England’s projection yesterday that the UK will suffer higher inflation for longer than other major economies and Ofgem’s energy price cap set to rise by approximately 42% to £2,800 in October, manufacturers are increasingly looking at opportunities to switch to renewables and greater asset utilisation to offset high energy costs in the second half of the year.

“Some niche sectors such as chemical manufacturing have continued to pass on price increases to consumers. However a growing cohort of businesses such as food manufacture and aerospace have experienced greater end-user pushback, particularly as consumers reduce their spending until there is more certainty on the UK’s economic outlook.”

He concluded: “Beyond the deluge of short term pressures, the projected rise in Corporation Tax to 25% for profits over £250,000 from April 2023 continues to loom large over the sector. To restore long-term confidence, the Government needs to incentivise greater investment in renewable energy, innovation and R&D, and increase manufacturers’ ability to trade internationally as the country stares down the barrel of a recession.”