UK manufacturing sector slowdown raises growth doubts

UK manufacturing growth is slowing, according to a survey published on Monday that revealed activity in June was much weaker than expected but that inflationary price pressures eased.

The UK manufacturing purchasing managers' index for June from IHS Markit and CIPS came in at a three-month low of 54.3, well short of the 56.3 consensus estimate and down from May's revised reading of 56.3.

The main factor driving the slowdown in June was a steep easing in the rate of increase in new orders, with the consumer, intermediate and investment goods industries all affected. The new orders index tumbled to 54.9, its lowest level since July 2016, from 59.0 in May.

Rates of new business wins rose at the weakest pace for nearly a year and new business growth retreated sharply from April’s near three-year high.

"This slowdown was largely centred on the domestic market, where increased business uncertainty appears to have led to some delays in placing new contracts," said IHS's senior economist Rob Dobson, who said the survey raised doubts as to whether the sector can sustain its growth into the second half of the year.

“Export orders remained disappointingly lacklustre despite the ongoing competitiveness boost of the weak sterling exchange rate," he added, with new export orders hitting a five month low.

Total new work volume growth slowed to its weakest in 11 months.

While the manufacturing sector weakened at the end of the second quarter, it was still the best quarter for three years.

As for inflation, rates of increase in input costs and output charges decelerated further from the highs seen at the start of the year. Supply-chain pressures remained evident, Markit noted, though weakening demand and the fall in the oil price saw output prices rise at the slowest rate since September.

Dobson said the sector had "largely weathered the uncertainty of a general election and start of formal Brexit negotiations" as it remained in growth and is likely to improve on its lacklustre opening quarter performance, but this will not quite be at the rate that had been hoped after solid growth in April and May due to the steep easing in the rate of increase in new order intakes.

“While the survey data add to signs that the economy is likely to have shown stronger growth in the second quarter, further doubts are raised as to whether this performance can be sustained into the second half of the year.”

REACTION AND ANALYSIS

The pound fell sharply against the dollar after the survey was published, down 0.44% to 1.2968 on the day, but flattish against the euro.

Despite the weakness of the pound, June's data "robustly challenges hopes that manufacturing and exports will pickup and offset the consumer spending slowdown", said economist Samuel Tombs at Pantheon Macroeconomics.

The decline in the export orders balance to just 52.6 from 53.4 underlined that sterling’s depreciation has not been a boon for manufacturers, he said.

While backlogs of work meant that the output balance fell only to 55.9, from 57.2, and the three-month average of the output balance is consistent on past form with a 1% rise in manufacturing output in the second quarter, Tombs said that if order books remain as weak as in June, output growth will slow sharply in the third quarter.

"Markit’s survey paints a radically less upbeat picture than the CBI’s, which reported that order books strengthened at the fastest rate since 1988 in June, but the former has been the more accurate indicator in the past."

He added that while the manufacturing report weakens the case for raising interest rates soon, Wednesday’s services PMI survey will have a much bigger bearing on the MPC’s debate.

Market analyst Naeem Aslam at Think Markets focused on the impact on the pound after the data "fell off the cliff" to indicate the economy "is not doing well at all".

He agreed that a greater focus will be on the services PMI data and "if we do see a similar picture, it could bring some devastating outcome for sterling".

EEF, the manufacturers trade body, remained bullish. Said senior economist George Nikolaidis: "The drivers of growth remain by and large international with the global economy starting to fire on all cylinders and manufacturers pouncing on the double whammy of stronger demand from key markets and weak sterling to grow and diversify their export base.

However he acknowledged that the build-up in UK political uncertainty "looks to be dampening sentiment in the sector somewhat" but was encouraged that it had not derailed strong levels of recruitment.