Low demand and high inflation hurts the industry

Manufacturing contracted for the 11th consecutive month in June, as factories were slowed down by disappointing demand both at home and abroad.

The S&P Global CIPS UK Manufacturing Purchasing Managers’ Index fell to 46.5 from 47.1 in may. A number below 50 indicates contraction.

The reading, which was originally 46.2 but revised to 48.2, remains the lowest since the financial crisis of 2008-09.

Samuel Tombs of Pantheon Macroeconomics said that the manufacturing downturn is not slowing.

Export orders have been hit by weaker business in markets such as the United States of America, China, Europe, and Brazil. Demand from abroad has also declined for 17 consecutive months. Businesses have been reluctant to invest due to this factor and other factors such as market uncertainty, increased competition, and higher costs.

Rob Dobson is a director of S&P Global Market Intelligence. He said that manufacturers are still in defence mode. They continue to reduce spending on employment and purchasing wherever they can, and free up capital held in stock.

The PMI’s measure of future production fell to its lowest point this year. Employment contracted for the ninth consecutive month. Cost inflation eased, however, as input costs such as fuel and commodities declined for the second consecutive month. The cost of materials and energy paid by factories fell the most since February 2016 while the prices charged by manufacturers decreased for the first since April 2016. The supply chains have also improved.

Dobson stated: “While some respite may be offered in the near term due to reduced pressures on the supply chain and costs, they remain a symptom for the current weakness in demand that the sector is facing and are therefore unlikely to play an important role in boosting the production going forward.”

David Atkinson is the head of manufacturing for Lloyds Banking Group. He said that manufacturers may be using cash faster as inflationary pressures, especially around salaries, continue.

The inflation rate has been at 8.7 percent for the past two months, after dropping from an 11-percent peak last year. The Bank of England warned of a slow decline in inflation this year, after raising its base interest rate to half of a percentage point. This was done to slow down the pace of price increases.

Bank of England still expects headline prices to drop significantly by 2023. However, core prices, which exclude food and energy are expected to remain “basically unchanged” in the short term. Core price growth reached a new high of 7.1% in May, a record for the past 31 years.

In June, manufacturers increased their finished goods stock at the fastest pace since November. They also reduced backlogs of work for a fourteenth consecutive month.

Manufacturing accounts for about 10% of the economy. Tomorrow, the final PMI for the services sector will be released. This sector makes up over 80% of the economy.

The manufacturing activity in the United States dropped to its lowest level in over three years in June. The Institute for Supply Management manufacturing PMI fell to 46.0 in July, down from 46.9 the previous month. This is the eighth consecutive month of contraction, and worse than economists’ expectations of 47.