Press release

2 Mar 2020 London, GB

Manufacturing activity at ten-month high in February but supply chains impacted

The final purchasing managers survey showed manufacturing activity at a 10-month high in February as it returned to growth following stabilisation in January after eight months of contraction.

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Related topics Growth
  • The final purchasing managers survey showed manufacturing activity at a 10-month high in February as it returned to growth following stabilisation in January after eight months of contraction.
  • Activity is benefiting from reduced uncertainty since December’s general election leading to greater client willingness to spend and increased business activity
  • The headline PMI overstates the strength of the manufacturing sector as a marked positive contribution came from a sharp increase of supplier delivery times. This is normally seen as positive and reflecting strong demand– but in this instance it was due to the disruption to supply chains stemming from coronavirus
  • Nevertheless, there was a fair amount in the manufacturing survey to be positive about. Output rose at the fastest rate for ten months while new orders grew at the fastest rate for 11 months. Business optimism rose to a nine-month high
  • 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, it was reported that the downturn in the investment goods sector continued in February. This suggests that businesses remain cautious about stepping up their investment – and the current mounting impact of the coronavirus outbreak on the global economy, markets and confidence is likely to reinforce this caution
  • Companies may become more wary about investment thereby weighing on demand for capital goods
  • 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 purchasing managers survey encouragingly pointed to manufacturing activity returning to growth in February and expanding at the fastest rate for ten months. It had previously stabilised in January following eight months of contraction.

“Specifically, the PMI rose to 51.7 in February (revised down modestly from the “flash” estimate of 51.9) from 50.0 in January and a 4-month low of 47.5 in December.

“February’s reading of 51.7 took the PMI above the 50.0 level which indicates unchanged activity.

“However, it should be noted that the headline PMI overstates the strength of the manufacturing sector as a marked positive contribution came from a sharp increase of supplier delivery times. Average vendor lead times were the longest since July 2018, while the suppliers’ delivery times index dropped by eight points (the largest monthly decline in the survey’s 28-year history). This is normally seen as reflecting strong demand and a positive – but in this instance it was due to the disruption to supply chains stemming from coronavirus.”

February survey largely improved

“Output rose for a second month running and at the fastest rate for ten months.

“Boding well for future output, new business in the manufacturing sector was the strongest since March 2019. Demand continued to be lifted by reduced political uncertainties and improving domestic activity. There were also some reports of manufacturers receiving orders redirected from clients experiencing supply-chain issues.

“Export orders fell for a fourth month, albeit at a reduced rate. Lower orders were reported from Asia due to the COVID-19 outbreak. Significantly, there were also reports of efforts to re-route supply chains away from the UK (following Brexit) contributing to weaker demand from the EU.

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, it was reported that the downturn in the investment goods sector continued in February. This suggests that so far businesses remain cautious about stepping up their investment.

“Employment contracted marginally in February after edging up in January.

“Stocks of purchases fell at the sharpest rate in over seven years. This reflected delays in the delivery of inputs and companies getting through their Brexit safety stocks..

“Business sentiment was up to a nine-month high.

“Price pressures in the sector were relatively limited. Input prices rose at the fastest rate for eight months in February but the increase was still modest; output prices rose at the slowest rate since December.”

Manufacturing output contracted markedly

“2019 was a very difficult year for the manufacturing sector as output contracted 1.5%.

“The latest ONS data shows that manufacturing output rose 0.3% month-on-month in December. However, this followed a sharp drop of 1.5% month-on-month in November so output was still down 2.5% year-on-year in December.

“Manufacturing output contracted 1.1% quarter-on-quarter in the fourth quarter of 2019. Eleven of the 13 manufacturing sub-sectors suffered contraction in the fourth quarter, with the largest drop occurring in transportation equipment.

“This was the third successive quarter of contraction in manufacturing output following drops of 0.2% quarter-on-quarter in the third quarter and 3.0% quarter-on-quarter in the second quarter. It had earlier expanded 1.8% quarter-on-quarter in the first quarter of 2019 as it was buoyed by customer stockbuilding ahead of the March Brexit deadline.”