Mild Output Growth Acceleration Masks Underlying Weaknesses

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May saw a mild improvement in the performance of the UK manufacturing sector. The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index (PMI) rose to 54.4, up slightly from April’s 17-month low of 53.9, to signal growth for the twenty-second straight month.

Key findings:

  • UK Manufacturing PMI rises slightly to 54.4 in May
  • Output growth ticks higher despite slower expansion of new work received 
  • Supply-chain constraints and cost pressures intensify

The improved trend signalled by the PMI masked several areas of potential concern. Although growth of production accelerated to its best during the year-so-far, this was mainly achieved through the steepest build-up of finished goods inventories in the 26-year survey history and a sharp reduction in backlogs of work.

Growth of incoming new business remained solid in May, but the pace of expansion eased to an 11-month low. The slower trend reflected a softer increase in new work from the domestic market, as inflows of new business from overseas strengthened slightly. Companies reported growth of new work from mainland Europe, North America, China, India, South America and Africa.

The pace of job creation in the manufacturing sector also lost momentum in May. Employment rose only marginally, with the pace of increase the lowest in 15 months. Higher staffing levels at intermediate and investment goods producers were partially offset by job losses at consumer goods producers.

UK manufacturers also faced rising cost inflation and supply-chain pressures during May. The rate of increase in average input prices accelerated for the first time since January, with companies reporting that general raw material cost increases were being exacerbated by shortages developing for a number of inputs. Average vendor lead times—a bellwether of supply-side constraints—deteriorated to the greatest extent during 2018.

Manufacturers maintained sufficient pricing power to pass on part of the increase in costs. May saw output charges rise for the twenty-fifth successive month, with solid increases across the consumer, intermediate and investment goods sectors. That said, the rate of selling price inflation eased to its weakest since last August.

UK manufacturers maintained a broadly positive outlook for the sector in May, with almost 52% of companies forecasting that production would rise over the coming year. That compared favourably to less than 6% that anticipate a contraction. Optimism was attributed to rising order intakes, growth in export markets, new product launches and planned company expansions. That said, the overall degree of positive sentiment dipped to a six-month low.

Rob Dobson, director at IHS Markit, which compiles the survey:

“At first glance, the mild acceleration in the rate of output growth and rise in the headline PMI would appear positive outcomes given the backdrop of the slowdown seen in manufacturing since the turn of the year. However, scratch beneath the surface and the rebound in the PMI from April’s 17-month low is far from convincing.

“A slowdown in new order inflows meant the expansion in production was achieved only by firms working through their backlogs of work. Weaker than expected sales meanwhile led to the largest rise in unsold stock in the survey’s 26-year history. This suggests that manufacturers have yet to fully adjust their production to the weakening trend in new business growth and there will need to be a rapid improvement in demand if output volumes are to be sustained in the coming months.

“Manufacturers will also likely be constrained if the resurgence in both cost inflation and supply-chain pressures becomes more firmly embedded. Input price inflation accelerated for the first time since January as general cost increases, often linked to higher oil prices, were exacerbated by shortages of certain inputs. Average vendor lead times—a key bellwether of supply-side constraints—lengthened to the greatest extent during 2018 so far. These price and supply headwinds, combined with a further slowdown in new order growth, could jeopardise any further expansion of the manufacturing sector.”

Duncan Brock, group director at the Chartered Institute of Procurement & Supply:

“To the casual eye, the manufacturing sector appears to be in a robust mood with a further rise in activity and the highest output growth for five months. But pore over the detail, there are some darker developments taking place, impacting on new order and jobs growth and creating the lowest optimism for six months.

“Manufacturers reported the weakest increase in new orders since June 2017, which translated into a dampening of the desire to hire especially in the consumer goods sector which experienced some job losses. Also, the performance of supply chains offered little reassurance as supplier delivery times got longer, raw material shortages became more acute and manufacturers struggled to complete production promises as a result of a squeeze on supplier capacity.

“Complacency should not replace vigilance as creeping business uncertainty and consumer apathy further compounded these deepening concerns. As Brexit worries continue to dominate, the sector will be looking to the UK Government to provide solutions and prevent this underlying fragility from becoming entrenched stagnation.”

About IHS Markit

IHS Markit is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions.

About PMI

Purchasing Managers’ Index (PMI) surveys are now available for over 40 countries and also for key regions including the eurozone. They are the most closely-watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends. To learn more click here.



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