A closely watched survey suggests that factories are experiencing one of the sharpest declines in production in over a decade. This is due to higher interest rates, and a drop in global demand.
The final purchasing managers’ index, published by S&P Global, and the Chartered Institute of Procurement & Supply in September, increased from 43 to 44.3. The reading, although an improvement, is still well below the threshold of 50 points that separates growth and contraction.
The figure for last month was revised from an earlier estimate that was 44.2. It was also a two-month record.
Export demand has decreased due to increased uncertainty about the health of global economy. In the report, it was noted that the decline in British exports for the 20th consecutive month is due to lower spending in Europe and the United States. The softening demand caused manufacturers to cut workers at the second highest rate in the last year.
Rob Dobson is a senior economist at S&P Global Market Intelligence. He said that the cost-of living crisis and recent interest rate increases are taking a toll on producers. This raises the possibility of broader UK economic contraction in the second half of this year.
Bank of England raised its base rate to 5.25 percent, a record high for 15 years. However, there are growing expectations that this could be its peak rate after the central banks paused rate increases last month.
Samuel Tombs of Pantheon Macroeconomics said that manufacturing is a smaller part of the economy than services, so its decline may not be “enough powerful to send the entire economy into a depression”. According to an earlier estimate, the services PMI fell to 47.2, its lowest level in 32 months.
There is more evidence that the inflation rate will continue to decline. The raw materials price has fallen at the fastest rate in the last seven years. This should help drag the consumer price index further down from its current level of 6.7%.
Separate survey revealed that Europe’s manufacturing sector was plagued by a recession this summer, and Germany, the largest economy in the bloc, led the downturn. S&P Global’s Eurozone Manufacturing Final Purchasing Managers’ Index, calculated by Hamburg Commercial Bank, fell to 43.4 from 43.5 in august. The initial estimate was not revised.
The tightening of interest rates worldwide as central banks try to reign in inflation combined with increased economic uncertainty has knocked the demand. Engineering suffered one of the steepest drops in new factory orders in the eurozone since the PMI surveys started in 1997.
According to the most recent reading, this drop in sales led factories to release their workers at a faster pace than they had in the past three years.
Cyrus de la Rubia is the chief economist of Hamburg Commercial Bank. He said, “The output PMI for the third quarter was below 50, and we feel pretty sure that the manufacturing recession continued during this time.”
The German manufacturing PMI fell below the earlier estimates at 39.6. This was a slight increase from the 39.1 recorded in August.
The viability of Germany’s heavily export-dependent economy model has been questioned by higher raw material costs, fiercer competition elsewhere and tighter monetary policies. The Organisation for Economic Co-operation and Development, a group of major nations, believes that Germany will be the only G7 country to experience a decline in GDP this year.
In September, the manufacturing PMI in America reached its highest level in ten months at 49.6, up from 47.6.