The downturn in the UK manufacturing sector continued at the start of 2024. January saw output and new orders decline further, leading to additional job losses and cutbacks in purchasing and stock holdings. Manufacturers also experienced rising supply chain difficulties, as the Red Sea crisis led to the re-routing of input deliveries away from the Suez Canal.
The seasonally-adjusted
S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) posted 47.0 in January, up from 46.2 in December but below the earlier flash estimate of 47.3. The PMI has signalled a deterioration in operating conditions in each of the past 18 months. Four out of the five PMI sub-components — output, new orders, employment and stocks of purchases – were showing trends consistent with overall contraction.
Manufacturing production decreased for the 11th successive month in January, with the rate of contraction unchanged from December’s solid pace. Companies linked lower output to weaker new work inflows, efforts to reduce inventory holdings and disruption caused by supply chain delays. Where an increase was reported, there was mention of work on existing contracts being used as a substitute for new orders to support production volumes.
Weaker demandContractions in output were signalled across the consumer, intermediate and investment goods industries. All of these sectors also saw intakes of new work fall during January. Weaker demand in both the UK and overseas markets led to a further drop in total new orders at the start of 2024. Low customer confidence, order cancellations and client de-stocking also negatively impacted new business. On the export front, UK manufacturers reported weaker intakes of new work from the USA, mainland China, the European Union (EU), Canada and the Middle East.
Rising geopolitical tensions focused on the Red Sea route to the Suez Canal led to a marked increase in average vendor lead times during January, as inputs ordered from overseas were re-routed around the lower tip of Africa. Overall supplier performance deteriorated for the first time in a year and to the greatest extent since November 2022. Some firms estimated that a minimum of 12-18 days could be added to vendor lead times for goods ordered from the APAC region.
Disruption to that key global trade route also contributed to higher average input costs in January. There were also reports of supplier price increases and rising costs for chemicals, electronics, energy, food stuffs, metals, packaging and timber. Part of the increase was passed on to customers in the form of higher selling prices, with output charge inflation registered for the fourth time in the past five months.
The start of 2024 saw manufacturing employment lowered for the 16th month in a row. Companies linked job losses to the ongoing downturn in the sector, which also contributed to cutbacks in purchasing activity and stock holdings. Input buying volumes fell for the 19th successive month.
Finished goods inventories fell at the quickest rate in almost 2.5 years, while the reduction in input stocks was the joint-steepest since November 2012 (matching that registered in August 2023).
UK manufacturers maintained a positive outlook despite the current downturn and persistent weakness of demand. Business optimism rose to a four-month high, reflecting new product launches, expectations of economic recovery and planned marketing efforts. That said, some firms remained concerned about weak market conditions and the risk of losing customers due to rising costs.
Cost-cautious approachRob Dobson, director at S&P Global Market Intelligence, said: “The downturn in UK manufacturing continued at the start of 2024, with output, new orders and employment all reduced in January. The contraction was widespread, with declines in all three variables seen across the consumer, intermediate and investment goods sub-industries. The ongoing weakness is leading to an increasingly cost-cautious approach at manufacturers, compelling cutbacks in purchasing and stock holdings as companies aim to achieve efficiencies, protect cashflow and defend fragile margins.
"Cost and stock management initiatives are being complicated by the Red Sea crisis. Diverting purchased inputs, especially those sourced from the APAC region, around the Cape of Good Hope is raising prices and extending supplier lead times. Some of our panel members estimate that a minimum of 12-18 days could be added to some expected deliveries, disrupting production schedules and raising inflationary pressures at a time when manufacturers are already struggling with weak demand both at home and overseas. One small ray of light from the January data is manufacturers expect some of these issues may be temporary, with an increasing number (over 50%) still forecasting output to be higher 12 months out.”
Chris Barlow, partner at MHA, an association of accounting, auditing, business advisory firms and chartered accountants, said: Sentiment was relatively positive at the start of the year, but this has waned as the month has progressed. The recent announcement from Tata Steel about the closure of the last two blast furnaces at the Port Talbot site will mean that the UK is the only nation in the G20 that isn’t able to produce its own steel. This does not send a positive message to the rest of the sector.”
Perfect stormHe continued: “The manufacturing industry is in the midst of a perfect storm. There are signs that there will be an impact on supply chains due to the events in the Red Sea and potentially also the new border controls on imports from the EU that were implemented yesterday, which will lead to further disruptions.
“These challenges are compounded by the uncertainty of when interest rates might fall, leading to further cost pressures. Manufacturers are going to be starting to feel the impact of corporation tax that came into force last April, as well as the increase in the minimum wage, which will have a knock-on effect and tax repercussions.”
He concluded: “With the Budget a matter of weeks away, UK manufacturing is keen for the Government to seize the opportunity to make a decisive impact with targeted measures, tax breaks and grants to help stimulate growth and put the brakes on further decline. Full expensing, announced in last year’s Autumn Statement, while helpful, was a drop in the ocean compared to what manufacturers were looking for and hasn’t given them the confidence to invest. With an election also on the horizon, the sector needs strong leadership and a renewed, comprehensive Industrial Strategy focused on getting to grips with the challenges the sector is facing, whichever political party is in power.”