Manufacturers are reporting a weakening economic backdrop, as demand is hit by rising interest rates, the cost-of-living crisis, export losses and concerns about the market outlook.
The seasonally adjusted PMI posted 43.0 in August, down from 45.3 in July, its lowest level since May 2020 and a reading consistent with a steep deterioration in operating conditions.
The downturn in manufacturing output took a further turn for the worse during August, as production volumes decreased for the sixth straight month. The rate of contraction accelerated to its steepest in a year and to one of the fastest in the survey history.
Companies mentioned slower market conditions, declining new order intakes and efforts to reduce inventories of finished goods as factors underlying the latest contraction.
August saw an accelerated decrease in new order intakes, as deteriorating market conditions both at home and in overseas markets hit demand. There were reports that a generally weaker global economic backdrop had led to declining order intakes from key markets such as the US, Europe, China and South America.
Furthermore, the rates of decline registered for both total new orders and new export business were among the steepest seen outside of the GFC and Covid-19 pandemic. Data broken down by sector signalled downturns across the consumer, intermediate and investment goods categories.
Intermediate goods was the weakest sub-industry overall, registering the fastest rates of decline for most variables, including output, new orders, new export business, input purchasing and employment.
Manufacturing staffing levels were cut for the eleventh successive month in August. Companies linked lower employment to reduced intakes of new work, falling output volumes and cost control efforts. Excess capacity at factories was also cited by some firms, as backlogs of work contracted to the greatest extent since April 2020.
The current downturn also affected the trends in raw material purchasing, stock holdings and suppliers' delivery times. Input buying volumes fell for the fourteenth month running and at the sharpest rate in almost three-and-a-half years.
Meanwhile, stocks of both inputs and finished products were depleted, as companies strived to cut costs, protect margins and run more efficient and leaner operations.
August saw average vendor lead times shorten for the seventh consecutive month. The underlying factors driving the improvement were generally negative, however. The decrease mainly reflected weak demand for raw materials and reduced workloads at both manufacturers and their suppliers.
After a prolonged period of marked inflation, August saw purchasing costs fall for the fourth month running and at the steepest rate since January 2016. Companies reported many inputs as down in price including energy, fuels, oil by-products, metals, polymers and rubber.
There was also mention of weak demand leading to lower costs. Although selling prices decreased, the reduction was marginal.
Finally, manufacturers maintained a positive outlook despite the current economic malaise. Optimism hit a four-month high, with 56% of firms expecting growth over the coming year. This was linked to hopes for a market revival, new product launches and acquisition/diversification plans.
Commenting on the PMI, Accenture’s Industry X lead, Maddie Walker, said: “British manufacturers continue to bear the brunt of tough economic challenges with a fast fall in production.
"While continued improvements in global supply chains and falling energy prices could yet lift manufacturers’ confidence that they can return to growth, manufacturers will be focused on how to get their costs down and boost productivity.
"Over the coming months, we expect that manufacturers will continue to invest in robotics and AI and look to more cost-efficient options in their supply chain. As we saw during Covid-19, manufacturers know what it takes to be resilient in tough times.”
Fhaheen Khan, senior economist Make UK, the manufacturers’ organisation said: “Today’s data indicates manufacturing production has hit the brakes as slowing demand takes hold of business activity. It is no longer just high inflation that is eroding spending power, but combined with higher interest rates depleting our willingness to spend has made for an unpalatable cocktail.
“Manufacturers are now acting by cutting jobs and investment as the backlog of work starts to dry leading to an inevitable downturn in economic activity soon. Policy makers and rate setters will need to be wary of the cost of higher unemployment given prices remain elevated for many consumers and the loss of incomes will hurt many if we take this too far.”
