UK manufacturing activity slides to 2yr low as exports dry up
UK manufacturing activity fell to a two-year low last month as export orders waned, according to a survey of the industry published on Monday.
August's UK manufacturing purchasing managers’ index fell to 52.8, IHS Markit reported, which was below the 54 the market had expected and the lowest reading since the sharp fall recorded in July 2016 immediately after the Brexit vote. July's reading was revised down to 53.8 after it was originally reported as having fallen to 54.0 from 54.3 the month before.
Based on previous official data, the latest PMI report suggests manufacturing production will contribute zero growth to the wider UK economy in the third quarter.
Further signs of slowdown were recorded in the sector, with rates of expansion in output and new orders eased alongside the first contraction in new export business for over two years. The output balance declined from 55.8 to 53.7.
Overseas demand contracted for the first time since April 2016, despite the continued weakness of the pound, with some manufacturing firms blaming softer global economic growth.
The fall in exports suggested that the possibility of a “no deal” exit from the EU in March alongside the moderation in global growth is starting to weigh more heavily on the sector, said economist Andrew Wishart at Capital Economics.
The drying up of export orders combined with reports of softer growth of new domestic orders to produce the weakest growth of new order inflows in the 25-month period of expansion enjoyed by the industry.
Business optimism dipped to a 22-month low, though 47% of manufacturers said they expected higher production in a year’s time.
“The performance of the UK manufacturing sector looked increasingly lacklustre in August," said Rob Dobson, director at IHS Markit, noting that this had led to the pace of job creation slumping to "near stagnation".
“Although slower growth of domestic demand contributed to manufacturing’s weak performance, the main constraint was the trend in new export business," he said.
“Looking ahead, manufacturers’ optimism about the outlook for the year ahead has been receding in recent months and is now at a 22-month low. While a hoped-for improvement in new export order growth and new product launches are forecast to stimulate future expansion, manufacturers are also expressing rising concerns about the uncertain backdrop of Brexit.”
The PMI report put more pressure on the pound on Monday morning, with the currency already beginning the new week lower on the back of new Brexit concerns over the weekend. Sterling was down 0.6% against the dollar and the euro to 1.2886 and 1.1099 respectively.
The output balance has the best relationship with the official figures and is consistent on the basis of past form with quarterly manufacturing growth of only just above zero, said Wishart. "But that would still mark an improvement on the 0.9% contraction in manufacturing in Q2."
While overall new orders fell back by than export orders, the survey implies the near-term outlook for manufacturing is poor, he said.
"The orders to finished stocks ratio – a good indicator of future output – suggests that the output balance could fall further ahead. Overall, while the survey doesn’t suggest that manufacturing will continue to contract in Q3, there is little sign of a strong rebound."