Brexit, low demand and high costs hit UK manufacturing

UK manufacturing: An employee at sewing machine in a factory
UK manufacturing was hit by falling output, lack of new orders, and staff cuts at the fastest rate in two years, with Brexit making a bad situation worse. Photo: Press Assocation

UK manufacturing continued its downturn in November while business sentiment towards future activity slipped to its lowest since April 2020, with Brexit making a bad situation worse.

According to the latest purchasing manufacturers index (PMI) from S&P Global and CIPS, factories were hit by falling output, lack of new orders, and staff cuts at the fastest rate in two years.

The manufacturing PMI index came in at 46.5 in November, slightly up from 46.2 in October, but still in contraction territory for the fourth month running.

Any reading below 50 indicates contraction. It was one of the lowest readings in the last 14 years.

Source: S&P Global
Source: S&P Global

Survey respondents also cited reduced inflows of new business, supply chain disruptions and ongoing shortages of numerous components on international markets.

November also saw the total intake of new work decline, as manufacturers experienced weaker demand in both domestic and overseas markets

Business sentiment also dipped to its lowest level since April 2020, early in the COVID-19 pandemic, amid reports of recession fears, weak consumer spending and subdued client optimism.

But manufacturers still expect production will grow over the coming year, with 44% forecasting expansion compared to only 18% anticipating a contraction.

"The manufacturing sector will be hoping that the measures announced in the Autumn Statement begin to curb then lower inflation and interest rates," Glynn Bellamy, UK head of industrial products at KPMG, said.

"They will also be nervously awaiting the review of business energy price support beyond March – as exposure to even higher energy costs will only further challenge business ability to withstand these economic conditions. Hiring activity is already slowing and manufacturers are holding off replacing voluntary leavers in light of the recession.”

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The intermediate goods sector, which makes products for use in final items, fared especially poorly, coming in as the weakest performing sector. Optimism in this industry was also at its lowest since expectations data were first collected a decade ago

New export business contracted at the quickest pace in two-and-a-half years, as demand from several trading partners – including the EU, China and the US – deteriorated. Exporters reported that client hesitancy and subdued global market conditions had contributed to the decrease.

Some also noted that the impact was exacerbated by issues relating to Brexit and supply chain issues.

Input price inflation also remained above the long-run survey average, despite easing to its second-weakest since the start of 2021. A vast array of inputs were reported as up in price, although survey evidence suggested that the direct and indirect impacts of high energy prices were particularly widespread.

Part of the increase in costs was passed on to clients through higher selling prices.

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“A lethal cocktail of Brexit, logistics constraints, high costs and low demand contributed to the continued decline in manufacturing output in November which also fed into deteriorating job numbers for a second month in a row,” Dr. John Glen, chief economist at the Chartered Institute of Procurement and Supply, said.

Meanwhile, James Brougham, senior economist at Make UK, said: “In the past year, demand has shielded industry from the worst of the fallout brought about by high inflation, soaring energy costs and staff shortages but this protective shield is now clearly ebbing away fast.

“As new orders dry up, so too does the cashflow that has allowed companies to operate in such a hostile environment. Industry knows this too, posting the worst optimism score since data were collected a decade ago.

“There is clearly a long winter ahead as those businesses that haven’t moved into a battle footing yet soon will, with investment continuing to decline as businesses repurpose planned capex towards business continuity and contingency spend.”

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