01 November 2022
Commenting on the latest CIPS UK Manufacturing Purchasing Managers’ Index which has dropped from 48.4 in September to 46.2 in October, Mike Thornton, national head of manufacturing at RSM UK, said: ‘The October manufacturing PMI paints a bleak picture, and, with the exception of the 2020 lockdown, when manufacturing stopped almost entirely, this is the lowest level we’ve seen since the 2008 financial crisis.
‘The future output index has also taken a sharp fall from 66 to 63.1. This is particularly concerning, as it demonstrates that orders are declining steeply, and have been since Russia invaded Ukraine.
The low backlog of work figure of 42.3 suggests manufacturers have now largely worked their way through the backlog created by the pandemic, and with the UK retail sector also in decline demand is now drying up, so it’s unclear what manufacturers are going to be producing over the next few months. As the new export orders index also fell to 40.6 in October, it’s looking unlikely that firms will be able to rely on external demand to supplement the weakening domestic market.’
Thomas Pugh, economist at RSM UK, added: ‘After a strong rebound following the pandemic, which saw manufacturing outperform other sectors, it is now falling behind, with monthly output declining to 2.1% below pre-pandemic levels. Unfortunately, the latest PMI data suggests the manufacturing sector looks set to deteriorate further over the coming year. The surge in energy costs has disproportionately impacted manufacturing compared to other sectors, and rising raw material costs have further squeezed it.
While the energy price guarantee is helping manufacturers to a degree at present, what happens when this runs out in April is not yet clear, and struggling manufacturers need some certainty so they can plan ahead.
Many manufacturers will be in survival mode right now, but those firms that are able to invest will be best placed to take advantage of the upswing in demand once the recession ends. A recent survey by Make UK and RSM highlighted that 6 in 10 manufacturers were planning to increase investment in the next two years. However, 43% said that a recession would damage their investment prospects, and rising inflation was also cited as a barrier to investment by a third of companies surveyed.
In terms of the manufacturing workforce, the labour market is already tight, so while we anticipate some redundancies, businesses that are able to stay afloat will want to retain good people, se we are hopeful redundancies will be kept to a minimum.
The forthcoming budget could also impact on how well the manufacturing sector fares. The Chancellor’s recent announcement of the need for £50bn in cuts could knock consumer confidence further, which may be a further setback for manufacturers as demand for new products drops.
If manufacturing firms have to bear the full brunt of the energy price shock, the sector will suffer a deeper recession than the rest of the economy, and the sector will likely permanently shrink. Overall, we anticipate the recession will last until Q3 2023, resulting in a drop in GDP of around 2%.’