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UK manufacturing output rises at fastest pace since 2014

01 September, 2020

During August, UK manufacturing output expanded at its fastest rate for more than six years, as manufacturers and their customers restarted operations following Covid-19 lockdowns, according to the latest monthly IHS Markit/CIPS PMI (Purchasing Managers’ Index). New order intakes strengthened, but the sector also recorded its seventh month of job losses, with employment declining at one of the steepest rates for 11 years.

The seasonally adjusted PMI rose to a 30-month high of 55.2 in August, up from 53.3 in July. The PMI has been above 50 for three consecutive months, indicating that it is in positive territory.

Manufacturing production rose at its fastest pace since May 2014, reflecting expansion in the consumer, intermediate and investment goods sub-sectors. The steepest growth was in intermediate goods, while investment goods producers saw the slowest growth.

Underpinning the climb in output was the fastest increase in new orders since November 2017. The UK domestic market remained the main source of new contracts, although export orders rose moderately for the first time in ten months. Manufacturers reported improved demand from the EMEA region, North America and Australia.

The main factors driving the growth in production and new orders were the re-opening of manufacturers and their customers following the Covid-19 lockdown and a loosening of other restrictions put in place to combat the pandemic.

Input price inflation hit a 20-month high in August. Rising costs were linked to reduced availability for certain inputs and supply-chain disruption caused by Covid-19. Manufacturers also mentioned exchange rates and increased freight costs. Part of the increase was passed on to customers, with selling prices rising at their fastest pace since March.

Business sentiment about future output prospects remained positive in August, staying close to July's 28-month high. Companies linked their expectations of expanding output to hopes of a move back to more normal operating conditions over time, the launch of new products, and the reopening of the domestic and global economies.

“The recovery of the UK manufacturing sector gathered pace in August,” reports IHS Markit director, Rob Dobson. “Output expanded at the fastest rate in over six years as new work intakes rose to the greatest extent since November 2017, led by an upturn in domestic demand and signs of recovering exports. Business optimism also remained encouragingly robust and close to July's recent peak.

“However, companies report that the current bounce is mainly driven by the restarting of manufacturers’ operations and reopening of clients as Covid-19 restrictions continue to be relaxed,” he adds. “Backlogs of work fell at an increased rate, hinting at spare capacity, and the labour market remains worryingly weak, with job losses registered for the seventh straight month. The downturn in employment may have further to run as the government’s furlough scheme is phased out, unless demand rises sharply.

The UK manufacturing PMI (vertical axis) recorded its second month of growth and its biggest leap for six years, during August
Source: IHS Markit / CIPS

“Given the fragility of demand and uncertain outlook, both in terms of Covid-19 and Brexit, policymakers may struggle to prevent a ‘surge-then-slump’ scenario from developing,” Dobson warns.

“Domestically, customers are playing their part in the recovery of the UK economy, with an upswing in new orders accelerating to the fastest rate since November 2017,” adds Duncan Brock, group director at the Chartered Institute of Procurement & Supply. “A smidgen of good news from overseas too with a small uplift in export orders for the first time in almost a year as optimism across the board was maintained that business could only get better.

“With supply-side capacity constraints still in evidence and shortages of raw materials sneaking in, it remains to be seen if demand holds strong,” Brock continues. “Manufacturers raised their prices in response to the sharpest increase in cost inflation for almost two years as fuel and transportation became more expensive.

“It seems the sector may be experiencing a V-shaped recovery with the fastest rate of growth in the manufacturing sector since May 2014,” he says. “However, amidst this positivity, the elephant in the room remains the poor employment figures. The drop in job numbers in August makes this feel more of a rebalancing strategy than real recovery. Companies are looking at how to stay in business for the rest of the year as challenges from the pandemic retreat a little only to be replaced by an imminent Brexit.”

Commenting on the PMI report, Fhaheen Khan, economist at the manufacturers’ organisation Make UK, says that it “highlights the sector’s role as the most likely candidate to lead the UK’s economic recovery whilst facing one of its deepest recessions on record”.

But he adds that “a number of concerns that may hinder that recovery remain, and that this honeymoon period for above-average growth may be short-lived. Particularly, as the Job Retention Scheme (JRS) expires at the end of October, Make UK’s most recent data already indicate job losses are picking up as firms are shedding weight in order to cut costs but risk the possibility of being unable to operate in the coming months.

“The Government must immediately remodel their approach to the JRS and extend it to the most vulnerable subsectors, such as automotive and aerospace, which are dealing with a different schedule for recovery and require a more tailored approach for support,” Khan says.

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