- The manufacturing sector lost momentum in January, as activity slowed to a three-month low. The PMI fell to 54.1 in January (revised up from 52.7) from more than a three-year high of 57.5 in December 2020
- The underlying PMI survey showed new orders contracted marginally in January while output growth was minimal at a seven-month low
- Manufacturers were adversely affected in January by temporary supply chain disruptions caused by COVID-19 restrictions and transport delays, especially at ports, following the end of the Brexit transition period on 31 December
- It is also likely that the manufacturing sector has been affected by the end of the temporary boost it received in late-2020 from stockpiling and a lift to foreign orders ahead of the Brexit transition period deadline. Export orders contracted modestly in January
- The consumer goods sector was reported to be the weakest manufacturing sector in January, adding to signs that consumers were adopting a more cautious approach at the start of the year
- The manufacturing sector welcomed the UK / EU Free Trade Agreement, but concerns remain around supply chain activity and increased regulation. The findings of the January purchasing managers’ survey reinforce these concerns
- The January manufacturing purchasing managers’ survey does little to dilute the view that the UK is being much more affected by lockdown and restrictions in Q1 2021 than it was in Q4 2020. The EY ITEM Club expects the economy will experience a contraction in Q1 – possibly in the region of 4% quarter-on-quarter
- After Q1, where current lockdowns are expected to remain in place – the EY ITEM Club expects the economy to benefit progressively through 2021 from the roll-out of COVID-19 vaccines. Consumers should play a key role due to currently high savings ratios, although much will depend on unemployment numbers
- The EY ITEM Club sees GDP growth of 5.0% in 2021 after estimated contraction of 10.1% in 2020.
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers survey shows the manufacturing sector continuing to expand in January but at a reduced rate as it was clearly hampered by supply chain disruptions caused by COVID-19 restrictions and transport delays, especially at ports, following the end of the Brexit transition period deadline.
“The PMI weakened to a three-month low of 54.1 (revised up from the “flash” reading of 52.9) from a 37-month high of 57.5 in December. This was still clearly above the 50.0 level that indicates flat activity, indicating expansion. The recent resilience of the manufacturing sector reflects the fact that lessons have been learned and experience gained in keeping activity going from the initial lockdown. For example, many factories have adjusted to meet social distancing requirements so employees can continue working.
“In addition to supply chain issues, manufacturers were affected in January by weaker export orders which contracted modestly. The sector received a lift in late-2020 from stockpiling and demand from the EU as producers sought to acquire critical inputs before the UK-EU transition arrangement ended on 31 December.
“Overall, new orders contracted marginally in January, the weakest performance for seven months. Companies reported that the national lockdown, the end of the Brexit transition period, client closures and renewed uncertainty at the start of the year all contributed to the decrease in new orders.
“Output growth was slight and January marked a seven-month low.
“It is notable that consumer goods was reported to be the weakest manufacturing sector in January, which adds to the signs that consumers are adopting a significantly more cautious approach at the start of the year.
“Small manufacturers were reported to have been particularly badly affected, with output and new orders falling, in contrast to upturns at medium- and large-scale producers.
“Nevertheless, confidence in output for the next 12 months has risen, reflecting hopes that the economy would progressively benefit from the rolling out of the COVID-19 vaccine.
“Manufacturing input prices rose the most for four years this January past, reflecting raw material shortages, transport delays and market forces. Increased costs were passed on to manufacturers’ clients, and consequently, manufacturing output prices rose at the highest rate since September 2018.”