- According to the purchasing managers, the manufacturing sector continued to grow in February and at a modestly improved rate despite the ongoing lockdown. The manufacturing PMI rose to 55.1 in February from a three-month low of 54.1 in January
- However, the underlying performance of the manufacturing sector was weaker than the headline reading indicated. The headline figure has been lifted by long supplier lead times, reflecting ongoing, significant supply chain issues. Manufacturers also faced input costs rising at the fastest rate for four years
- Output rose at the slowest rate for nine months in February, but there was renewed modest growth in new orders after they had declined marginally in January
- Confidence was at a 77-month high, buoyed by recovery hopes from the pandemic. Reduced Brexit uncertainties were also reported
- The consumer goods sector was reported to be the weakest manufacturing sector in January, adding to signs that consumers are adopting a more cautious approach at the start of the year
- The February survey eases some concern about the potential size of contraction in the UK economy in Q1. Nevertheless, it still appears 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 clear contraction in Q1 – possibly around 4% quarter-on-quarter
- After Q1, the EY ITEM Club expects the economy to benefit progressively through 2021 due to the COVID-19 vaccines roll-out. Consumers look well-placed to play a key role given the recent high savings ratios, although much will depend on how much unemployment ultimately rises. After an extended period of weakness, business investment is expected to gain momentum over the course of the year as companies grow more confident in the economy
- The EY ITEM Club currently forecasts GDP growth of 5.0% in 2021 followed by expansion of 6.5% in 2022. This means the economy regains its peak level of Q4 2019 in Q3 2022
Howard Archer, chief economic advisor to the EY ITEM Club, says:
“The purchasing managers survey shows the manufacturing sector continuing to expand in February but at a modest underlying rate. The PMI rose to 55.1 in February – revised up from the ‘flash’ reading of 54.9 – after dipping to a three-month low of 54.1 in January from a 37-month high of 57.5 in December.
“The fact that the manufacturing sector has been able to keep growing despite lockdown reflects the fact that lessons have been learned in keeping activity going from the initial lockdown. Many factories have been adjusted to meet the social distancing requirements so employees can still work on site.
“However, the headline PMI rate overstates the underlying performance of the manufacturing sector. The rate has been lifted by long supplier lead times which reflect ongoing significant supply chain problems. Markit said that this was down to international shipping delays, worldwide demand for raw materials and Brexit-related trade issues. Around of 58% of Markit’s survey panel reported longer delivery times from suppliers, while only 2% saw an improvement in February.
“Output growth was slight in February with the index at a nine-month low of 50.5, down from 50.7 in January.
“It is notable that the consumer goods sector was reported to be the weakest manufacturing sector in February, which adds to the evidence that consumers are adopting a significantly more cautious approach at the start of the year. Investment goods was the best performing sector, while intermediate goods also growth in output and new orders.
“New business rose in February after slight contraction in January, which had been the first decline since June. Domestic demand improved in February while export demand was reported to have inched up. Jobs rose at the fastest rate since mid-2018, albeit modestly.
“Confidence in output for the next 12 months was at a 77-month high, buoyed by recovery hopes from the pandemic. Reduced Brexit uncertainties were also reported. Manufacturing input prices rose the most for four years, reflecting raw material shortages, transport delays and market forces.
“Increased costs were passed on to manufacturers’ clients. Consequently, manufacturing output prices rose the most since January 2018.”