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UK manufacturing falls at fastest pace since 2020 lockdowns

UK manufacturing: A worker in a factory processes new orders
The fall in UK manufacturing knocked business optimism down to a two-and-a-half year low. Photo: Molly Darlington/Reuters

The UK manufacturing sector continued to shrink last month as new orders contracted at the fastest pace since May 2020.

According to S&P Global’s manufacturing purchasers’ index (PMI), a steep drop in new work received, weak export demand, and supply-chain disruption led to a scaling back of both production and employment.

The index came in at 46.2 in October, down from 48.4 the month before – a 29-month low. Any reading below 50 indicates a shrink in activity.

Although this was above the earlier flash estimate of 45.8, the PMI has now remained below the neutral 50 mark for three consecutive months.

UK manufacturing PMI for October
UK manufacturing PMI for October

Sales from overseas clients fared poorly during the period, with new export business decreasing for the ninth month running. This was due to the weakening global economic situation, softer Chinese demand, the war in Ukraine, and ongoing issues relating to Brexit stifling export performance.

The consumer, intermediate, and investment goods sectors all saw output decline, with performance in the intermediate goods sector being especially weak.

But the shortfall in new order intakes led to a solid increase in stocks of finished goods. Inventories rose for the sixth consecutive month, albeit at the slowest pace since June, S&P said.

The data also revealed that job losses were reported for the first time since December 2020, “reflecting redundancies, cost control initiatives and difficulties in both recruiting and retaining staff and specific skill sets”.

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The overall darkening situation knocked business optimism down to a two-and-a-half year low, as weak demand, recession fears, inflationary pressures and rising uncertainty hit confidence.

John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: “No wonder the UK’s makers were down in the dumps with the lowest optimism for the year ahead for two and a half years as the burden of potential rail strikes affecting freight added to their downbeat assessment.

“Manufacturing may not be the largest sector of the UK economy, but its importance is clear as supply disruptions continue abroad and more capacity is needed domestically to keep the wheels turning for clients and consumers alike.”

Some 43% of the survey panel forecast that production levels would be higher one year from now, supported by new product launches and possible decreases in both economic and political volatility.

Price inflation remained substantial at the start of the fourth quarter, with both input costs and output charges rising at above survey-average rates. However, rates of increase in both price measures eased slightly in October.

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Companies reported a vast array of items as up in price. These included chemicals, electronics, energy, food, metals, packaging, paper and timber. Transportation and administration costs also rose.

There was mention of the war in Ukraine, general inflationary pressures and the sterling exchange rate all contributing to higher prices.

“There is evidence that the UK manufacturing sector is starting to contract, as consumer and business demand dips, whilst the impact of inflation is being felt on operational costs,” Simon Jonsson, UK head of industrial products at KPMG, said.

“The volatility of the pound, a weakening order pipeline, together with expectations around interest rates all paint a challenging picture for the manufacturing sector. Many firms are also still experiencing supply shortages, which is compounding the issue.

“Without a strong pipeline of new work, parts of the manufacturing sector are pressing pause on post-pandemic capacity building, and worse – some firms are making redundancies to save on business costs. This is the first month of manufacturing job losses since late 2020.

"There is a strong manufacturing sector in the UK and manufacturers will be looking keenly to the November 17 autumn statement for the government to set out its agenda to ensure the UK economy remains competitive.”

Watch: How does inflation affect interest rates?