Weak domestic demand and high cost inflation push manufacturing output lower

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Latest data from the Chartered Institute of Purchasing & Supply (CIPS) and Markit shows that, at 45.8 in June, from a downwardly revised figure of 49.5 in May, the seasonally adjusted CIPS/Markit Purchasing Managers Index (PMI) fell sharply to its lowest reading since late 2001 when conditions in the sector were affected by the economic fallout from the terror attacks on the US.

Latest PMI data indicated that UK manufacturers faced a restrictive combination of weak demand, especially from the domestic market, and intense cost inflationary pressure. Rates of increase for input costs and factory gate prices hit series record highs, with inflation of output charges having now broken new peaks through the first half of 2008.

Companies scaled back production markedly in June, and to the greatest extent since December 1998, as domestic market conditions deteriorated further and demand from abroad slowed. Order books were reportedly hit by rising inflationary pressures and the high cost of credit, which led a number of clients to postpone or cancel non-essential expenditure. There were further reports that levels of new work received from the construction, retail and public sectors had fallen. The seasonally adjusted New Orders Index posted a reading of 43.2.

The seasonally adjusted New Export Orders Index dropped from 51.1 in May to 47.4 in June pointing to a moderate decline in demand from overseas. Slower economic growth restricted sales in a number of key foreign markets including China, France and the US.

Average input prices increased at the fastest rate in the sixteen-and-a-half year survey history, as soaring oil, energy and metal prices drove purchasing costs higher and led to an associated increase in factory gate prices. The latest seasonally adjusted Input Prices Index recorded a reading of 82.1, with manufacturers reporting higher prices for chemicals, food products, packaging, plastics and timber. There were also reports that the weakness of the sterling against the euro is continuing to push up the cost of raw materials imported from the Eurozone.

Weaker operating conditions in the UK manufacturing sector filtered through to the labour market in June, as manufacturing jobs were cut at the sharpest pace since August 2005. The seasonally adjusted Employment Index posted a reading of 46.5 amid reports of redundancies and the non-replacement of leavers at plants to offset rising cost pressures.

June also saw the volume of uncompleted work contract at the fastest rate in the surveys history. The seasonally adjusted Backlogs of Work Index recorded a reading of 39.9, reflecting lower levels of incoming new business and the settling of previously agreed contracts from existing stocks.

Comment:

Commenting on the UK Manufacturing PMI survey, Roy Ayliffe, Director of Professional Practice at the Chartered Institute of Purchasing and Supply, said:

After pointing to stagflation in May, Purchasing Managers in the UK manufacturing sector saw conditions worsen considerably in June to levels of contraction not seen since the immediate post-9/11 period."

Faced with a relentless onslaught of ever weaker domestic demand, slower global economic growth and record cost inflationary pressure, manufacturers scaled back production, which contracted at the most severe levels in nearly a decade. There was no good news for the sectors labour market either, as the decline in order books led to a continued culling of jobs.

Rob Dobson, Senior Economist at Markit Economics, said:

The UK manufacturing sector buckled under the weight of a brutal combination of survey record cost inflation and weak domestic demand in June. Output and new orders suffered their sharpest drops since late 1998, partly reflecting the ongoing downturn in the housing and credit markets. With conditions in these markets showing no sign of immediate improvement, manufacturing jobs cut at the fastest pace in three years and a series record fall in work-in-hand, times are likely to remain tough entering Q3. On the prices front, output charge inflation broke a new record high in June, which will raise further alarms on the MPC."


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