UK manufacturers see a return to growth in April

The UK manufacturing sector made a positive start to the second quarter of the year, with the trends in output, new orders and employment all showing signs of improvement. Supply chain and price pressures continued to grow, however, as disruptions, delays and the war in the Middle East were felt
across the sector. The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) rose to a 47-month high of 53.7 in April, its best level since May 2022 and little-changed from the earlier flash estimate of 53.6. The headline PMI has posted above its neutral 50.0 mark – signalling expansion – for six successive months.

Four of the five PMI sub-components (output, new orders, employment and suppliers' delivery times) were all at levels usually consistent with improved operating conditions. Stocks of purchases also declined to one of the weakest extents during its current 43-month sequence of contraction. Manufacturing production rose for the sixth time in the past seven months. The scaling up of output volumes reflected improved new order intakes, efforts to clear backlogs of work and a minor build up of finished goods stocks. Output growth was broad-based by sector, with increases seen across the
consumer, intermediate and investment goods categories.

Improved intakes of new work from domestic and overseas clients contributed to a fifth successive increase in total new orders in April, with the rate of expansion accelerating to one of its highest during the past four years. Part of the increase reflected clients bringing forward purchases to mitigate expected supply chain delays and price increases.

Client confidence is a challenge
New export business rose for the fourth consecutive month, albeit to a slightly weaker extent than in March. Intakes of new work improved from clients in the USA, China, Japan, and India. There were, however, reports of new export order growth being stymied by the effects of Middle East conflict and restricted passage through the Strait of Hormuz on global economic expansion and client confidence.

Business optimism fell to its lowest level in a year during April, as manufacturers remained concerned about the impact of the war in the Middle East on global economic growth, geopolitical instability and the consequences of Government policy. That said, companies still expect new product launches, planned marketing activity, improved client confidence and hopes for a more stable geopolitical backdrop to support output growth over the coming year.

Supply chain pressures continued to build in April. Average vendor performance deteriorated to the greatest extent in almost four years, linked to ongoing complications caused by the Middle East war and restrictions on transit through the Strait of Hormuz. Shortages of freight capacity, port disruptions and customs delays were also mentioned by manufacturers.

Supplier delays and the resulting shortages of inputs led to a further steep acceleration in purchase price inflation during April. Input costs increased at the quickest pace since June 2022 and to one of the greatest extents registered by the survey (which began in January 1992) outside of the postpandemic inflationary surge.

Manufacturers reported a wide range of inputs as up in price, including chemicals, electronics, energy, food stuffs, metals, plastics, pulp and timber. The feed-through of higher taxes and staff costs (employer NI and minimum wages) also contributed to higher purchasing costs. Subsequently,
manufacturers raised their average selling prices for the fifth successive month and at the fastest rate since November 2022.

A rise in purchasing activity
Purchasing activity rose for the first time in three months in April, as some firms stepped up input buying to mitigate expected price increases and supply disruption. Stocks of purchases fell only marginally, while there was a mild build-up of finished goods inventory.

Rob Dobson, a director at S&P Global Market Intelligence, said: “April saw the growth rate of the UK manufacturing sector recover after being hit by the impacts of the war in the Middle East during March. The headline PMI rose to a near four-year high, as the trends in output and new orders strengthened. Staffing levels were also increased for the first time in 18 months.

“The upturn comes with several of catches, however. Restrictions on transit through the Strait of Hormuz are causing substantial disruptions to input deliveries, with supplier lead times lengthening to the greatest extent in almost four years. The resulting material shortages are exerting steep pressure on purchasing costs. Input prices rose at one of the fastest rates in the 34-year survey history, and at a pace rarely exceeded outside of the pandemic-related inflationary surge of 2021-22.

"It should also be noted that the gain in production is partly the result of clients bringing forward purchases to mitigate expected price uplifts and supply disruptions. As this process unwinds later in the year, alongside declining business optimism, growth in the sector could cool while inflationary pressures remain on high heat.”

Closure of Strait of Hormuz
Chris Barlow, head of manufacturing at MHA, said: “April’s manufacturing PMI activity exceeded market expectations suggesting that for the moment the sector is dealing well with a challenging situation. That increase is likely to be the result of firms bringing forward orders and building up stocks as tensions remain in the Middle East and worries remain over energy supplies and the closure of the Strait of Hormuz.

“In the near term the bigger concern is that supply chains are starting to creak again with longer delivery times, parts shortages and wider transport delays quickly hitting output, even if demand is so far holding up. If DHL logistics workers contracted to JLR go ahead with their planned indefinite strike in early May, this will cause additional disruptions, potentially leading to further setbacks in manufacturing activity later in the spring. With the addition of soaring fuel and freight costs, manufacturers could be pushed back into stop-start production as they protect inventories and have less room to absorb shocks.

“The PMI may still point to expansion, but the next few months are going to be bumpy until there is more certainty on fuel prices and supply. That is why the Government is under pressure to move faster on relief. Rachel Reeves has promised to widen the British Industrial Competitiveness Scheme, which aims to cut electricity bills for around 10,000 manufacturers by up to a quarter. But with the main support not due to arrive until next year, even if it is backdated, many firms will argue it does not help with the immediate squeeze from higher energy, fuel and shipping costs.”

Alexander Fitzgerald, founder and CEO of Isembard, concluded: “The continued rise in manufacturing output shows that UK manufacturing is finding its footing. But a few months of positive growth do not reverse decades of decline. The UK’s share of global manufacturing GDP stands at just 0.3%, but there is growing demand for domestically produced components. With huge global instability, it has never been more important for companies to reshore their manufacturing back in the UK, and across the country, new factories are opening every month to make sure high-quality parts are made in Britain, and delivered as quickly as possible.”