Press release

1 Apr 2020 London, GB

Manufacturing sector relapsed in March – EY ITEM Club comments

Signs of improved manufacturing activity at the start of 2020 were brought to a sudden halt in March as the final purchasing managers survey showed renewed contraction in the sector as coronavirus increasingly impacted on the economy.

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  • Signs of improved manufacturing activity at the start of 2020 were brought to a sudden halt in March as the final purchasing managers survey showed renewed contraction in the sector as coronavirus increasingly impacted on the economy. Furthermore, the contraction in activity was deeper than indicated by the “flash” estimate as the final March manufacturing PMI came in at 47.8 (“flash reading was 48.0). This was down from a 10-month high of 51.7 in February.
  • It should be noted that the headline PMI understates the weakness of the manufacturing sector as a marked positive contribution came from a sharp lengthening of supplier delivery times. 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 the disruption to manufacturing inputs because of factory shutdowns around the world and shipping delays due to coronavirus.
  • Output fell the most since July 2012 with the weakness widespread, except for food production and pharmaceuticals. All other elements of the survey were markedly weaker in March. New business falling at the sharpest rate since mid-2012 bodes ill for future activity while manufacturers’ confidence was at a record low.
  • The sharpest fall in manufacturing jobs since July 2009 reported by the purchasing managers highlights the importance of the Government’s Coronavirus Job Retention Scheme.
  • With the economy clearly suffering a downturn in March as coronavirus increasingly affected activity (culminating in the lockdown of 23 March) EY ITEM Club suspects that GDP contracted around 0.5% quarter-on-quarter in the first quarter.
  • There is no doubt that the UK is headed for substantial contraction in the second quarter – EY ITEM Club’s current expectation is that GDP will decline around 12% quarter-on-quarter.
  • We also expect GDP to contract 5.8% over 2020. There are clearly substantial downside risks, but we believe the economy can start to recover in the third quarter and then see a further pick-up in activity late in the fourth quarter. This is on the assumption that coronavirus peaks during the second quarter, and the Government starts to relax some of the restrictions on social distancing and on business activity during the third quarter.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

The purchasing managers survey showed manufacturing activity relapsing back into contraction in March as coronavirus increasingly impacted on the economy. The manufacturing sector had shown signs of improvement at the start of 2020 as activity benefitted from reduced uncertainty since December’s decisive General Election leading to a greater willingness by some companies to spend and increased business activity.

Specifically, the PMI fell back to 47.8 in March (revised down from the “flash” estimate of 48.0) after rising to a 10-month high of 51.7 in February from 50.0 in January and a four-month low of 47.5 in December.

March’s reading of 47.8 took the PMI back below the 50.0 level which indicates unchanged activity.

Furthermore, it should be noted that the headline PMI understates the weakness of the manufacturing sector as a marked positive contribution came from a lengthening of supplier delivery times. Indeed, Markit indicated that the lengthening of delivery times was the greatest since the survey began in 1992. 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 the disruption to manufacturing inputs because of factory shutdowns around the world and shipping delays due to coronavirus.

March survey weaker across the board; sharp fall in new orders and confidence bode ill for future activity

Output contracted at the sharpest rate since July 2012. New orders also declined at the sharpest rate since mid-2012, boding ill for future activity. Unsurprisingly confidence in the sector was at a record low.

Weakness in output and new orders was reported across the consumer, investment and intermediate goods sectors. This was reported to be the consequence of coronavirus-related disruptions, loss of confidence and company shutdowns.

The only exceptions to the widespread weakness was activity in the food production and pharmaceutical sectors.

The fall in new orders was the consequence of reduced domestic and foreign demand. Export orders also fell at the sharpest rate since mid-2012, with widespread weakened demand.

Employment fell by the largest rate since July 2009. Price pressures in the sector were relatively limited.