October's UK manufacturing PMI supported the poor signal sent by the ‘flash’ reading, falling to 46.2 – the lowest since May 2020. Moreover, businesses appear to expect weak conditions to continue, with employment declining for the first time in nearly two years.
However, the survey did show a reduction in input and price pressures. This, combined with signs that the economy is heading into a recession and the prospect of further fiscal tightening, should moderate the Monetary Policy Committee's appetite for the large rate increases markets are expecting in 2023.
Martin Beck, chief economic advisor to the EY ITEM Club, says: “The manufacturing PMI fell to 46.2 in October from 48.4 in September. The sector's PMI has broadly been on a downward trend since the start of the year, but October's index showed the weakest activity – outside of the pandemic – since 2009.
“The details of the survey raised more concerns as respondents reported a significant fall in new orders. This was driven by an especially fast decline in domestic sales, with survey respondents reporting that high stock levels and subdued confidence were significant issues, while a weakening global economy was also a consideration. The slowdown in the manufacturing sector has been more dramatic than in services, and businesses appear to expect these conditions to remain in place. This is evidenced by the first contraction in job creation numbers since December 2020.
“While a weak pound added to the cost burden in October, the survey pointed to a slight easing in both price and cost pressures overall. The combination of easing price pressures and falling activity strengthens the expectation from the EY ITEM Club that, despite the recent re-pricing, market expectations for interest rates remain much too high for 2023. The EY ITEM Club still expects rates to rise by 75bps later this week, with an outside chance of a smaller, 50bps increase.”