Upturn of the UK manufacturing sector was constrained by supply chain disruption and rising costs, latest PMI data finds

2 min read

​The upturn of the UK manufacturing sector was constrained by supply chain disruption and rising cost pressure in February, keeping output growth only marginal despite a modest improvement in new order intakes, according to the latest IHS Markit/CIPS Purchasing Managers’ Index (PMI)​.

The PMI rose to 55.1 in February, up from 54.1 in January and above the flash estimate of 54.9. The PMI has signalled growth for nine months in a row. Output rose at the weakest pace during the current nine-month sequence of increase. New orders expanded following a slight decrease in January, as domestic demand improved and new export business inched higher.

Companies reported improved demand from several markets – including the US, Asia, Scandinavia and (in a few cases) mainland Europe – but noted that the ongoing impact of Covid-19, Brexit complications and shipping difficulties also constrained export order growth.

Investment goods was the best performing sector during February, registering the fastest growth of output, new orders, new export business and employment of the three industries covered by the survey. Intermediate goods also saw production and new business increase, in contrast to the continued downturn at consumer goods producers.

Business optimism rose to a 77-month high in February, with over 63% of companies reporting that they expect output to be higher in one year's time. Positive sentiment was linked to continued recovery from the pandemic, reopening of the global economy (including less transport restrictions) and reduced Brexit uncertainties.

Backlogs of work also ticked higher, increasing for the fourth month running. The combination of rising output, new orders and outstanding business alongside improved sentiment among manufacturers encouraged further job creation.

Employment rose for the second month running and at the quickest pace since June 2018. Hirings also reflected the ongoing recovery from Covid-19 and raising capacity to meet future demand growth.

Input cost inflation accelerated for the tenth straight month in February and to its highest rate for over four years. Output prices subsequently rose at the fastest pace since January 2018. The prime drivers of rising costs were supply-chain disruption and raw material shortages. Average vendor lead times lengthened to one of the greatest extents in the near 30-year survey history.

Over 64% of firms reported higher purchase prices, while nearly 59% saw supplier delivery delays. February saw a further substantial reduction to stocks of finished products. The rate of depletion was the steepest since September 2009, reflecting disruption to production schedules and manufacturers intentionally selling from inventories.

Rob Dobson, director at IHS Markit, said: “The UK manufacturing sector was again hit by supply chain issues, Covid-19 restrictions, stalling exports, input shortages and rising cost pressures in February. Look past the headline PMI and the survey reveals near stagnant production, widespread shipping and port delays and confusion following the end of the Brexit transition period.

“In fact the biggest contributor to the headline PMI reading was a near-record lengthening of supplier delivery times. However, while normally a positive sign of an increasingly busy economy, the recent lengthening was far from welcome, more often than not linked to problems resulting from Brexit and COVID related. The resultant shortages for a vast array of components and raw materials, as rising demand chased restricted supply, led to a further acceleration in input cost inflation to a four-year high.

“With current constraints likely to continue for the foreseeable future, pressure on prices and output volumes may remain a feature during the coming months. That said, improved domestic demand as lockdown restrictions ease and a further rise in manufacturers' optimism are reasons to hope brighter times are on the horizon, and have already supported a modest rebound in staffing levels since the turn of the year.”