UK manufacturing goes from bad to less bad

UK factory orders have had their biggest monthly jump since records began, hitting 49.5 in August and halting the steep decline.

by Rebecca Burn-Callander
Last Updated: 19 Aug 2013

UK manufacturing isn’t out of the woods yet but, according to the latest Markit/CIPS manufacturing purchasing managers' index, the sector began slowly grinding back to life last month with a PMI of 49.5 up from 45.2 in July.

A figure below 50 still technically indicates a downturn, but the 4.3 point hike is the largest jump registered for manufacturing since 1992 and puts the PMI at a four-month high. And the rates of contraction have eased sharply across all areas of manufacturing, including production, new orders, and exports – good news for makers and distributors alike.

But, just when you think things are looking up, Markit/CIPS drops another bomb. Following hot on the heels of the manufacturing data, the figures for the construction industry indicate a surprise contraction, with PMI dropping to 49.0 in August from 50.9 in July, the lowest reading since June.

The construction industry is vital to the UK economy, accounting for about 10% of GDP, and the sector's 10% decline in the first half of 2012 was one of the key reasons that the UK fell back into recession at the end of last year. But manufacturing makes up a slightly greater proportion of the UK economy - between 14% and 17%. This latest industry growth will help to counteract the drag elsewhere on the economy.

The UK’s PMI figures are in stark contrast to the continuing contraction elsewhere in the world. Even in the manufacturing powerhouse that is China, manufacturing activity fell to a nine-month low last month, reflecting the ongoing fall-off in international demand. And across the Channel in the eurozone, manufacturing output remained below the 50 mark for the 13th successive month. The UK has had a lucky – and highly unusual – August.

But economists are quick to point out that every silver lining contains a cloud: ‘The marked easing in the rate of contraction at UK manufacturers is heartening, if only because last month’s steep pace of decline wasn’t repeated,’ explains Rob Dobson, senior economist at Markit. ‘However, [it does] little to change the underlying picture of a fragile sector facing enormous headwinds.’

Indeed, when manufacturing body EEF conducted a separate survey into the state of UK manufacturing, it has found that trading conditions for the last quarter were at their toughest since early 2010. Confidence in the sector is ‘draining away’ concluded the report, which reckons that the sector will contract by a further 1.5% in 2012. However, the upturn is on the horizon. Once 2013 comes around, the sector should start growing again, expanding by some 1.5% next year.

But a lot depends on the state of the eurozone. Britain desperately needs to up its export business if it is to see significant growth. Domestic demand just can’t cut the mustard. And it’s been a long, painful wait so far. As Markit’s Dobson says, ‘Long unsatisfied hopes that the manufacturing sector could export its way back to health remain jilted by the marrying of a downturn in our largest export market. The performance of the sector is therefore likely to remain subdued and volatile until underlying structural imbalances are resolved.’

So, until a solution can be found for the ongoing turmoil in the eurozone economies, the wait will continue.

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