Retrenchment of UK manufacturing continued in October.

Retrenchment of UK manufacturing continued in October. Marked drop in cost inflation CIPS/Markit UK Manufacturing PMI

Key points:

*Manufacturing PMI remained close to survey record low.

*Output sank further as retrenchment in demand continued.

*Inflation of purchasing costs eased sharply and was below that for output prices.

Summary:

The downswing of the UK manufacturing sector remained severe in October, as rates of contraction in output, new orders and employment remained close to the survey records posted in the previous month. At 41.5 in October, little-changed from the series low of 41.2 in September, the seasonally adjusted CIPS / Markit Purchasing Managers Index (PMI) pointed to a further marked deterioration in overall operating conditions.

The headline PMI and the index tracking developments in production both remained below the no-change mark of 50.0 for the sixth month running in October, suggesting that the UK manufacturing sector is already in technical recession.

Manufacturers linked the latest drop in production to reduced levels of incoming new work, as Octobers seasonally adjusted Output Index posted a reading of 42.4, signalling a rate of contraction only slightly slower than the previous months survey record. There were also signs that small and medium-sized manufacturers were being hit harder by the downswings in output and new orders than large enterprises.

Ongoing financial turmoil, economic uncertainty and weaker demand from the construction and retail sectors were blamed by manufacturers for the latest drop in new work. 

October data signalled the downturn had broadened to encompass the investment goods sector, which had bucked the trend of declining output in both August and September after recording back-to-back expansions.

Although the domestic market remained the principal source of demand weakness for UK manufactured products, volumes of new export orders also showed a substantial decline. Anecdotal evidence indicated that the effect of deteriorating economic conditions in the European Union, the US and east Asia on suppressing foreign demand outweighed any benefit from the weaker exchange rate. This was reflected in Octobers seasonally adjusted New Export Orders Index, which came in at 43.5, its lowest reading since September 2001.

The outlook for the sector also remained bleak in October. Backlogs of work fell sharply to suggest that declining levels of new orders were leading manufacturers to erode buffers of outstanding work. Latest data also pointed to a near survey-record reduction in employment, as companies trimmed excess capacity and aligned staffing levels to lower production requirements. Octobers seasonally adjusted Employment Index recorded a reading of 40.5, a rate broadly unchanged from Septembers seventeen-and-a-half year survey record.

Cost inflation eased noticeably in October, reflecting weaker demand and sharp drops in oil and other commodity prices. The rate of increase was the slowest during the current thirty-nine month period of cost inflation and weaker than that signalled for output prices. Anecdotal evidence suggested that exchange rate factors had enabled a number of companies to increase (sterling) export prices.

Comment:

Roy Ayliffe, Director of Professional Practice at the Chartered Institute of Purchasing & Supply, said:

Conditions for UK manufacturers remained brutal in October, as the turmoil in the worlds financial markets showed no signs of abating. Purchasing managers in the sector have now reported six consecutive months of decline in production, endorsing industry reports that the UK is now technically in recession.

While weak domestic demand continued to severely hamper new business prospects, October also saw new export orders slump to levels last seen in the immediate aftermath of 9/11. Faced with this barrage of obstacles, small and medium-sized manufacturers fared the worst, while the government seeks to introduce measures to protect them.

We expect the dramatic drop in cost inflation this month to embolden the MPC to cut interest rates.

Rob Dobson, Senior Economist at Markit Economics, said:

There can be no doubt that UK manufacturing has fallen into recession. Conditions have deteriorated rapidly over the past couple of months, as credit market turmoil and the ongoing retrenchment in global demand have proved to be a dreadful combination for UK manufacturers. New orders are becoming increasingly scarce and job losses are rising. A further 50 basis point cut may be in the offing, especially as recent oil and commodity price falls create downside risks to inflation.