Manufacturing PMI fell to a 39-month low in August – EY ITEM Club comments

• August's manufacturing Purchasing Managers’ Index (PMI) fell significantly. Respondents reported that rising borrowing costs and still-high price pressures had weakened demand and led to another decline in new business. These headwinds are unlikely to fade in the near-term.
• The S&P Global/CIPS survey pointed to another fall in input costs, while output price inflation also cooled. Alongside other evidence of a weakening economy and disinflationary pressures, the probability of another 25bps rate rise in September is now looking less certain.

Martin Beck, Chief Economic Advisor to the EY ITEM Club, says: “August's final S&P Global/CIPS manufacturing survey signalled that the sector's downturn is becoming increasingly marked. Respondents reported another substantial decline in activity, with the PMI falling to 43.0 from 45.3 in July. The index was dragged down by a significant decline in production, as the impact of rising interest rates on customer demand continued to grow. The impact on intermediate goods producers was particularly prominent.

“The forward-looking balances of August’s survey remained largely downbeat. Respondents reported a steeper fall in new business, with demand falling both at home and from abroad. This suggests that the manufacturing output balance could yet fall further in the near-term. The official manufacturing output series has been much firmer, but the EY ITEM Club is sceptical this will last given the continued pressure on household and corporate finances from rising borrowing costs and still-high inflation.

“However, there are some grounds for optimism on the inflation front. Input costs fell outright for the fourth consecutive month on the back of lower energy and raw material prices. Output price inflation also cooled slightly, suggesting that the weakness in demand is meaning a greater proportion of manufacturers are now passing lower costs onto consumers, rather than seeking to rebuild margins.

“For sure, the Monetary Policy Committee's (MPC) focus in its forthcoming September rate decision is likely to remain on measures of inflation persistence in the official pay and services inflation data. But growing evidence of a weakening economy and disinflationary pressure mean the possibility that the MPC will choose to keep rates unchanged is looking more plausible.”