- The final December manufacturing purchasing managers’ survey was marginally better than the “flash” report, but still pointed to a sector struggling at the end of 2019 – a year in which it was hampered by a number of uncertainties (Brexit, domestic political, global economic and trade) which pressurised both domestic and foreign demand for manufactured goods.
- The survey reported that ongoing concerns relating to the economic, global trade and political outlooks weighed on manufacturing activity in December.
- The final December manufacturing PMI was edged up to 47.5 from the "flash" reading of 47.4. This was perhaps to be expected following the decisive General Election result, which likely eased some of manufacturers' uncertainties, but the sector is likely disappointed that there was not a larger upward revision.
- The survey indicated that manufacturing activity contracted for an eighth month running in December and at the second fastest rate (after August) since July 2012.
- The weakness in the December survey was most pronounced in the investment goods sector, where output fell at the fastest rate for 89 months and orders fell markedly) adding to the evidence that businesses continue to hold back on investment. There was also contraction in output and new business in the intermediate goods sector.
- Marginal expansion was reported in consumer goods output, while there was increased new business in the sector, highlighting the importance of consumer spending on growth prospects. Not only was manufacturing output reported to have fallen at the fastest rate for 89 months in December, but another sharp drop in new orders bodes ill for output prospects in the near-term at least.
- The survey added to the overall evidence that the labour market has lost overall momentum since the middle of 2019. Manufacturing employment contracted for a ninth month running in December, albeit at a reduced rate.
- The purchasing managers’ surveys have tended to present an overly gloomy picture at times of heightened political and other uncertainties. Nevertheless, the sustained weakness of the manufacturing survey suggests that the sector may well have made a negative contribution to GDP in the fourth quarter, increasing the possibility that the economy stagnated.
- Manufacturers are clearly hoping that the uncertainties surrounding the economy are diminished by December’s decisive General Election result and by the UK leaving the EU with Boris Johnson’s deal on 31 January – and that this encourages businesses to step up their investment and demand for capital goods and consumers to become more willing to splash out on big-ticket durable goods.
- However, a concern for manufacturers is that significant Brexit concerns along with a challenging global environment may well continue to limit the upside for investment in 2020 while consumers face less favourable fundamentals due to a softer labour market and reduced earnings growth.
- UK manufacturers could be impacted by EU companies switching supply chains away from the UK. This may be countered however by UK companies switching their supply chains from the EU to the UK.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“The final purchasing managers survey of 2019 pointed to manufacturing activity contracting for an eighth month running in December – the second fastest rate since July 2012. Although it was revised up slightly from the “flash” reading (as had been the case in November). It highlights that the manufacturing sector continues to struggle with both domestic and foreign demand under pressure.
“Domestic demand for manufactured goods has been hampered by businesses' caution over investment amid a number of uncertainties – Brexit, domestic economic and political, global economic - which has limited expenditure on capital goods. Meanwhile, weakened global growth and an uncertain trading environment is weighing down on foreign demand for UK manufactured goods.
“Indeed, the survey reported that ongoing concerns relating to the economic, global trade and political outlooks weighed on manufacturing activity in December.
“Specifically, the PMI dipped to a four-month low of 47.5 in December 2019 (revised up slightly from the “flash” reading of 47.4) from 48.9 in November, and the six-month high of 49.6 in October, when it had been boosted by stockbuilding and sales ahead of the scheduled 31 October date for the UK to leave the EU). It had earlier hit a low of 47.4 in August 2019; the lowest level since July 2012. December’s reading of 47.5 took the PMI further below the 50.0 level, which indicates unchanged activity.
“Some upward revision to the final December PMI from the “flash reading” was perhaps to be expected given that the final survey would have been bolstered by replies received after the decisive General Election result, which likely eased some of manufacturers' uncertainties. In fact, it is disappointing that there was not a larger upward revision.
“The manufacturing PMI averaged 48.7 over the fourth quarter of 2019, clearly still in contraction territory, although up from the third quarter average of 47.9.
December survey largely weak across the board
“Output contracted for an eighth month running in December 2019, and at the fastest rate for 89 months. Manufacturing output was held back by producers looking to reduce their stocks of finished goods, which had been built up ahead of the UK’s scheduled exit from the EU on 31 October.
“The weakness was most pronounced in the investment goods sector, where output fell at the fastest rate for 89 months), indicating that businesses were continuing to hold back on investment amid a myriad of uncertainties and a struggling economy.
“There was also contraction in output in the intermediate goods sector, which stood at a five-month low.
“Marginal expansion was reported in output in the consumer goods sector, highlighting the importance of consumer spending to growth prospects.
“New orders also fell for an eighth month running in December. This was reportedly due to customer destocking, weak export sales and delayed decisions due to the General Election. Export orders fell at one of the sharpest rates for seven years.
“Investment goods, and to a lesser extent intermediate goods. saw the largest drop in new orders in December.
“On a positive note there was a pick-up in new business from the consumer sector.
“There was also a drop in employment for a ninth month running – although the rate of decline was the least since August, slowing from November’s sharpest drop since September 2012.
“Business sentiment was reported to be positive, albeit down from November and below long-term norms. Input buying was the weakest it has been since April 2009 after they had been built up in advance of the previously scheduled 31 October Brexit date. Stocks of inputs and finished products both fell.
“Price pressures picked up modestly in the manufacturing sector in December. Input prices rose marginally; output prices increased at the fastest rate for six months.
Manufacturing output rose modestly in October but underlying performance remained weak
“Latest ONS data shows that manufacturing output rose 0.2% month-on-month in October; this was a lacklustre rebound after a dip of 0.4% month-on-month in September, and it could also have been modestly boosted by some stockbuilding ahead of the UK’s previously scheduled departure from the EU on 31 October. Consequently, manufacturing was still down 1.2% year-on-year in October.
“Manufacturing output was also down 0.7% on a three-month/three-month basis in October.”