Manufacturing activity contracts as demand remains subdued – EY ITEM Club comments

• March's manufacturing Purchasing Managers’ Index (PMI) fell to 47.9, weighed down by factors including weak demand and declining export orders. While a fractional rise in new orders and a marked increase in business optimism suggest there may be some light at the end of the tunnel for the sector, current headwinds mean the EY ITEM Club doesn’t expect a turnaround until H2 2023.
• The S&P Global/CIPS survey also pointed to a further easing in input cost and output price pressures. These developments are consistent with other signs that inflation is cooling, including lower energy prices. This reinforces the EY ITEM Club’s view that Consumer Price Index (CPI) inflation will fall at pace this year.

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The manufacturing PMI fell to 47.9 in March from 49.3 in February, leaving it in sub-50 contractionary territory for the eighth consecutive month. Perversely, a record improvement in delivery times, reflecting an easing in supply-chain disruption, dragged the PMI down. However, the S&P Global/CIPS survey also signalled a decline in manufacturing output, with production held back by weak demand, declining export orders and a preference among companies for reduced inventory holdings.

“Although the survey's backward-looking balances continued to disappoint, its forward-looking indicators offered some glimmers of hope. Respondents reported a slight uptick in new orders, while manufacturers' expectations of future business activity also grew, with business optimism rising to a 13-month high. But while prospects for the sector are looking more promising and headwinds from high inflation are softening, the EY ITEM Club doesn’t expect a significant turnaround in manufacturers' fortunes until the second half of 2023, when the squeeze on household and corporate spending power eases more significantly.

“On that front, today's survey offered some good news. Input cost inflation cooled further on the back of better resource availability and lower commodity prices. There was also evidence that lower cost pressures are starting to feed through to customers, with prices charged inflation also slowing. This reinforces the EY ITEM Club’s expectation that inflation peaked at the end of 2022 and should fall at speed in 2023. The EY ITEM Club thinks the CPI measure will end this year below 3%.”