United Kingdom manufacturers faced a dangerous combination of deteriorating market conditions and record cost inflation in July. Recent months saw levels of output and new orders fall at rates unseen since late 1998, while input cost inflation has set new survey highs in each of the past two months. Further evidence of rising price pressures was also seen at the factory gate – with average output charges rising at the fastest rate since output price data were first collected in November 1999.
At 44.3 in July, the seasonally adjusted Chartered Institute of Purchasing and Supply/Markit Purchasing Managers’ Index (PMI) fell to its lowest level since December 1998 and has posted a sub-50.0 reading in each of the past three months.
The level of new work placed with U.K. manufacturers contracted at the fastest rate in more than 9.5 years in July. The seasonally adjusted New Orders Index posted a reading of 40.5 as companies cited weaker demand from domestic clients. There were also reports that the downturn in the housing market, the high cost of credit and competition from lower-cost foreign producers impacted on new order volumes. Levels of new business received from abroad also contracted during July.
The latest data pointed to a further marked reduction in U.K. manufacturing output. Apart from weaker demand, companies reported that delays in the supply of certain raw materials had disrupted production schedules.
July saw input cost inflation rise to a new survey record as the seasonally adjusted Input Prices Index posted a reading of 63.1. Rates of increase were either at, or close to, series highs in the consumer, intermediate and investment goods sectors. The high price of oil remained the principal
factor pushing-up purchasing costs.
Part of the rise in input prices was passed on to clients in July in the form of increased transportation and distribution charges.
The latest increase in costs was also partly offset through reduced levels of staff. The seasonally adjusted Employment Index fell to a reading of 43.3 as headcount was reduced at the greatest extent since the final quarter of 2001. Job losses have now been recorded in each of the past four months, with the rate of decline accelerating through this period.
July data also pointed to the sharpest reduction in outstanding business since backlogs data were first collected in November 1999. The seasonally adjusted Backlogs of Work Index posted a low of 39.5 as many companies expressed that spare capacity – resulting from lower demand – had been diverted toward completing existing contracts.
Roy Ayliffe, director of professional practice at the Chartered Institute of Purchasing and Supply, said: “Purchasing managers reported a third consecutive month of contraction in the U.K. manufacturing sector in July, as the combined forces of worsening market conditions and record cost inflation continued their relentless onslaught. Levels of new business plummeted further and at the worst rate in over nine and a half years, with manufacturers facing increasingly notable tough conditions abroad as well as at home. Shortages of raw materials – in addition to weaker demand – were a worrying factor behind the further fall in manufacturing output in July, while headcount was reduced to the greatest extent since late 2001 as part of the wider effort to combat record cost inflation."
Rob Dobson, senior economist at Markit Economics, said: “A corrosive mix of falling demand and record cost inflation penetrated almost all areas of the U.K. manufacturing sector in July. Recent months have seen output and new orders fall at their fastest rates for around 9.5 years, leading to sharp cutbacks in employee numbers, as manufacturers struggle to obtain new contracts in the face of deteriorating economic conditions at home and abroad, ongoing housing market turmoil and a weak consumer market. However, with inflation of input costs and output prices climbing further to set new record highs, the MPC will be loathe to risk anchoring inflation expectations at above target levels through a near-term cut in rates.”