Press release

3 Feb 2020 London, GB

UK manufacturing sector stabilised in January after eight months’ contraction

The final purchasing managers’ survey showed that manufacturing activity stabilised in January after eight months of contraction.

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  • The final purchasing managers’ survey showed that manufacturing activity stabilised in January after eight months of contraction. This suggests that the manufacturing sector had an initial – if relatively modest – lift from reduced uncertainties following December’s decisive General Election result and more clarity over the UK leaving the EU on 31 January with a deal. 
  • The purchasing managers’ surveys can tend to overstate developments at times of significant changing political circumstances, so the survey could possibly exaggerate the manufacturing pick-up in January after overplaying some of the earlier weakness.
  • The PMI climbed to 50.0 (revised from the “flash” estimate of 49.8) from 47.5 in December, exactly in line with the 50.0 level that denotes flat activity. It is notable that the first three “flash” readings for the manufacturing sector have all been revised up in the final survey.
  • Encouragingly, the forward-looking indicators offered hope that the manufacturing sector could imminently see expansion. New orders grew for the first time in nine months, albeit modestly. Confidence in the sector was at an eight-month high. Employment edged up for the first time in 10 months.
  • There were, however, clear differences in the performances of different manufacturing sectors in January. Output and new orders rose in the consumer sector (highlighting the importance of consumer spending to growth prospects) and also in the intermediate goods sector.
  • However, output and new business contracted in the investment goods sector, despite being at a reduced pace. This suggests that initially at least, businesses remain cautious to step up their investment.
  • Manufacturers will clearly hope that over the coming months that businesses do become more willing to step up their investment and demand for capital goods, due to reduced near-term uncertainties surrounding the economy following December’s decisive General Election result, and with the UK now having left the EU with a deal. They will also be hoping that consumers become more willing to splash out on big-ticket durable goods as well as make more discretionary purchases.
  • Export orders continued to contract in January (and were particularly weak from Europe) despite some signs that global economic activity may be stabilising – although this is currently at risk from the coronavirus outbreak – while the Phase One trade deal between the US and China has raised hopes of a less fraught trading environment this year.
  • A concern for manufacturers is that significant Brexit concerns along with a still pretty challenging global environment may well continue to limit the upside for investment in 2020.
  • Another concern for many manufacturers is the UK Government stating that the UK will diverge from EU rules in their future relationship (after the transition arrangement ends). This is seen as meaning that many manufacturers will face costs, cumbersome new rules and frictions at the border, which businesses are unhappy about, especially those with integrated supply chains. Among the sectors that are particularly concerned about this are cars, aerospace, and food and drink.
  • 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 pointed to manufacturing activity stabilizing in January after contracting over the previous 8 months

Specifically, the PMI climbed to a nine-month high of 50.0 in January (revised from the “flash” estimate of 49.8) after dipping to a four-month low of 47.5 in December from 48.9 in November and a 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).

“January’s reading of 50.0 took the PMI exactly up to the 50.0 level which indicates unchanged activity.

January survey largely improved across the board

“Output edged up in January for the first time since May, while boding well for future output, new orders expanded for the first time since April, albeit modestly.

“Output and new orders rose in the consumer sector (highlighting the importance of consumer spending to growth prospects) and also in the intermediate goods sector.

“However, output and new business contracted  in the investment goods sector, albeit at a reduced pace. This suggests that for now at least, businesses remain cautious to step up their investment.

“The pick-up in new orders was entirely due to domestic demand as export orders continued to clearly contract (albeit modestly less than in December). Demand from Europe was reported weak.

“Business sentiment was up to an eight-month high. Although it was still relatively limited compared to long-term norms.

“Employment rose slightly in January after contracting over the previous nine months.

“Inventories of purchases fell at the sharpest rate since May 2013 as businesses reduced Brexit safety stocks and looked to improve cash flows.

“Price pressures in the sector were relatively limited. Input prices rose marginally in January; output prices rose at a slightly reduced rate from December’s sharpest increase for six months.

Manufacturing output contracted in November

“Latest ONS data show that manufacturing output contracted 1.7% month-on-month and 2.0% year-on-year in November; this followed a gain of 0.5% month-on-month in October. Manufacturing output likely suffered in November from a correction after there had been some build up in stocks by clients ahead of the UK’s planned exit from the EU on 31 October, which was of course delayed.

“Manufacturing output was down 0.8% in the three months to November compared to the three months to August. The weakness was widespread with 10 out of 13 sectors suffering three-month/three-month contraction in November.”