- Encouraging news for Q3 growth prospects as purchasing managers report that the manufacturing sector achieved its strongest expansion for 30 months in August
- The manufacturing PMI rose to 55.2 in August (revised down marginally from the ‘flash’ reading of 55.3) from 53.3 in July, 50.1 in June, 40.7 in May and a record low of 32.6 in April
- Output expanded at the fastest rate since April 2014, with solid expansion across the intermediate, consumer and investment goods sectors
- New orders grew at the fastest rate since November 2017, primarily due to improved domestic demand. Export demand also edged up for the first time in 10 months. Meanwhile, confidence in August was close to July’s 28-month high
- However, there was a slightly deeper fall in manufacturing jobs reported by purchasing managers in August. This may prompt the Chancellor to consider further steps to support the labour market in the Autumn Budget
- The August manufacturing purchasing managers’ survey bolsters the EY ITEM Club’s belief that the economy will see a substantial rebound in Q3 after GDP contracted a record 20.4% quarter-on-quarter in Q2. The EY ITEM Club expects GDP growth of at least 12% quarter-on-quarter in Q3; growth could reach around 15% as the economy benefits from reduced lockdown restrictions and the release of pent-up demand
- However, the EY ITEM Club suspects growth is likely to slow appreciably in Q4 with unemployment likely to rise following the ending of the furlough scheme and as the boost from pent-up demand wanes
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers survey pointed to manufacturing expansion accelerating to a 30-month high in August, and achieving a third month of growth.
“The PMI rose to 55.2 in August (revised down marginally from the ‘flash’ reading of 55.3) from 53.3 in August, 50.1 in June, 40.7 in May and a record low of 32.6 in April. It had previously fallen to April’s low from 48.0 in March and 51.7 in February, which had indicated the first expansion since April 2019.
“August’s reading of 55.2 took the PMI markedly above the 50.0 level, which indicates unchanged activity.”
Output grew at fastest pace since April 2014; new business expanded at fastest rate since November 2017
Howard Archer continues: “Output grew at the fastest rate since April 2014 in August. This was the consequence of manufacturers and their clients increasingly re-starting operations following the lockdown.
“Solid expansion was reported across the intermediate, consumer and investment goods sectors. The strongest expansion was seen in the immediate goods sector and the weakest in investment goods, which is little surprise. The outlook for business investment still looks uncertain given the difficult times many companies have had and the still-significant uncertainty over the longer-term outlook for the recovery.
“New business rose for a second successive month and at the fastest rate since November 2017. Domestic demand led the way.
“Encouragingly, export orders rose for the first time in 10 months, with improved orders reported from the EMEA region, North America and Australia.
“Confidence in the manufacturing sector edged back in August, but was still close to July’s levels – which had been the highest since March 2018. Confidence was supported by expectations of output growth, hopes of a move back to more ‘normal’ operating conditions over time, the launch of new products and the ongoing reopening of the domestic and global economies.
“Employment in the manufacturing sector fell for a seventh month running, at a slightly increased rate in August. This may prompt the Chancellor to consider further steps to support the labour market in the Autumn Budget, following the measures announced in July’s Summer Statement.”
Howard Archer adds: “Input prices rose at the fastest rate for 20 months. Output prices rose at the fastest rate since March, but manufacturers’ margins were squeezed.”