Manufacturers need industrial strategy as PMI hits lowest level since financial crisis, warns RSM UK

01 September 2023
Commenting on the latest CIPS UK Manufacturing Purchasing Managers’ Index which has continued the downward trend falling to 43, Mike Thornton, national head of manufacturing at RSM UK, said: ‘The manufacturing PMI in August decreased to 43, the lowest level excluding the pandemic since the financial crisis, indicative that the manufacturing industry is weaker than the wider UK economy. Looking more closely at the data, the backlogs of work index fell sharply to 34, and the new orders index fell below 40 to 38.6 for the first time since December 2022, both clear signs that the pipeline of activity has dried up following the massive surge in production after the pandemic. 

‘The quantity of purchases and stocks of finished goods indices also fell to 36.7 and 47.4, implying that demand remains slow. As manufacturers work through their remaining backlogs without signs of replenishment, businesses will continue to struggle to protect their margins. In addition, manufacturers have been hit particularly hard by the surge in interest rates over the last 12 months as they need capital investment in order to grow, reinforcing the urgent need for an industrial strategy.’ 

He added: ‘However, it’s not all negative, as the input prices index fell to 42.7, suggesting that inflationary pressures are decreasing, albeit slightly. In addition, the sector will soon start to feel the benefit of real wage increases and easing of energy costs, which will hopefully allow manufacturers some breathing room until clarity from the government is provided.’ 

Thomas Pugh, economist at RSM UK, added: ‘Another drop in the manufacturing PMI is undeniably bad news for the sector but it should be taken in context. As the manufacturing PMI looks at the monthly change in activity and is influenced by sentiment it has probably been painting an overly pessimistic picture over the past year. Indeed, in June activity in the manufacturing sector was 3.8% above its pre-pandemic peak. Admittedly, this is a 2.3% drop from the post-pandemic high in mid-2021, when demand for goods soared amid lockdowns. But it compares favourably compared to a 1.3% rise for the economy as a whole. 

‘As such, the decline in the manufacturing PMI over the last year probably reflects the hangover from the post-pandemic boom as much as it does a decline in underlying demand. That said, manufacturers have been able to get by on backlogs built up during the pandemic. At 34.0 the PMI is suggesting that those backlogs have all but been worked through and with new orders at 38.6 the hangover looks set to intensify over the next six months.’