Manufacturers not out of the woods despite uptick in PMI, warns RSM UK

01 November 2023

Commenting on the latest CIPS UK Manufacturing Purchasing Managers’ Index which has seen a slight uptick for the second consecutive month to 44.8, Rachel Milloy, senior analyst in manufacturing at RSM UK, said: ‘The manufacturing PMI in October increased for the second consecutive month to 44.8, up from 44.3 in September. Although still well below 50, the upward trend indicates stability in the market and is a positive sign that manufacturing output will continue to improve, albeit slowly. 

‘With interest rates and inflation really impacting pipelines over the last year, this is hopefully the change in momentum manufacturers have been waiting for as inflation starts to come down resulting in a plateau to interest rate hikes. But, the industry is now in its second year of contraction, which, coupled with input prices bucking the downward trend of the last five months and increasing to 44.1 in October, means manufacturers will be focused on maintaining their margins, rather than increasing profits.’

She added: ‘Looking at the bigger picture, most countries in the G7 have experienced the same challenges as the UK when it comes to manufacturing, due to it being an energy-intensive industry reliant on capital investment, with the energy crisis and economic uncertainty really driving its downturn. More encouragingly, this month has seen the US PMI reaching 50 – the first country in the G7 to do so since May. This a positive sign for UK manufacturers that although not quite out of the woods yet, things are heading in the right direction with output likely to move towards 50 in the next six months. 

‘Much of the recent optimism within the US has been driven by a strong industrial strategy that includes facets like the Inflation Reduction Act and the Chips and Science Act that support investment and growth. This does beg the question if the UK had an industrial strategy, could we be doing better? It’s the key component that manufacturers continue to call for, and government must urgently consider its position, to ensure the gap between the UK and other G7 countries doesn’t accelerate

Thomas Pugh, economist at RSM UK, added: ‘The tick up in the S&P/CIPS Manufacturing PMI to 44.8 in October suggests that growth in the manufacturing industry remained subdued at the start of the final quarter of the year. Indeed, the overall economy probably contracted by 0.1% in Q3, but we don’t expect that to mark the start of a recession. Growth should rebound in Q4 as inflation takes another leg down and large cost-of-living grants boost consumer spending. 

‘However, it will make more pleasant reading for the Bank of England. The weak economic environment meant that the employment index remained well below 50, although it did rise a little (46.3 to 46.4), indicating that employment growth remains weak. What’s more, the input prices balance also remained well below 50 at 44.1, indicating that price pressures are continuing to ease. That will be complimented by the fall in the output prices balance to 48.6, suggesting that firms are cutting their prices. 

‘Overall, the PMIs paint a picture of a subdued manufacturing sector that is feeding through to lower employment growth and slowing inflation. If this weakness is reflected in the official data over the next few months, it would suggest that the Monetary Policy Committee’s job is largely done and keeping interest rates at current levels is sufficient to bring inflation back to the 2% target.’ /Ends