May's manufacturing Purchasing Managers’ Index (PMI) fell, remaining in contractionary territory and continuing a long run of weak outturns. The survey reported a fall in demand, with new orders declining both domestically and abroad. Given the headwinds currently facing the sector, the EY ITEM Club doesn’t expect a turnaround in manufacturers’ fortunes until the latter part of this year.
The S&P Global/CIPS survey pointed to a further easing in input cost and output price inflation in the manufacturing sector. However, evidence of further inflation persistence elsewhere in the economy means the EY ITEM Club thinks the Monetary Policy Committee (MPC) raising interest rates by 25bps in June is now likely.
Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “The manufacturing PMI fell to 47.1 in May from 47.8 in April, leaving it in sub-50 contractionary territory for the tenth consecutive month. The decline in activity was broad-based, with most of the S&P Global/CIPS survey’s sub-indices signalling a weaker manufacturing environment, offsetting the benefits from an improvement in supply-chain performance.
“Manufacturers reported a decline in new orders, with goods producers suggesting this was driven by a significant fall in exports, resulting from tougher competition in overseas markets and subdued global demand. However, manufacturers remained upbeat about expectations of future business activity, reflecting hopes of a more favourable cost environment and a recovery in demand. That said, the EY ITEM Club still thinks the manufacturing sector will face challenges in the near term, until falling inflation helps to reduce the squeeze on household and corporate budgets later this year.
“On that front, May's survey offered some glimmers of hope. Manufacturers reported a decline in input cost inflation, owing to a fall in energy bills and declining raw material prices. Meanwhile, subdued demand meant output price inflation eased further. Although news of weaker activity and slowing inflation in the manufacturing sector makes life a little easier for the MPC, the EY ITEM Club thinks evidence of greater inflation persistence in the official data, including the much larger services sector, probably meets the committee's criteria for further tightening. As a result, a further 25bps increase in June is looking likely.”