Manufacturing sector is stagnating, reinforcing urgent need for industrial strategy, says RSM UK

Commenting on the latest CIPS UK Manufacturing Purchasing Managers’ Index which has continued the downward trend, falling to a six-month low of 46.5 in June, Mike Thornton, national head of manufacturing at RSM UK, said: ‘The manufacturing PMI in June saw a slight decrease to 46.5, with future output and new orders falling to 73 and 44.9 respectively. Although the backlogs of work rose slightly to 42.2, this is still well below 50 – all clear signs that demand remains low and that the sector is stagnant. This doesn’t come as a surprise, as manufacturing has been in recession for some time whilst the rest of the economy has, to date, managed to avoid it. This is partly due to the sector being energy-intensive, as well as the surging cost of raw materials seen until recently.  

‘On a more positive note, input and output prices both dropped in June, which in an inflationary environment, is welcome news for manufacturers and consumers. However, a slight fall in input prices will not mask the consequence of increasing interest rates which are a barrier to much-needed investment. The combined effect of increasingly expensive capital and weak market conditions has created extremely difficult market conditions for UK manufacturers. Now, more than ever, an industrial strategy is urgently needed from government to support the sector, its people, and to help revitalise the wider economy. For now, we await Kemi Badenoch’s announcement on advanced manufacturing this month and hope it provides some clarity and demonstrates some much-needed longer term thinking.’ 

Thomas Pugh, economist at RSM UK, added: ‘The sharp fall in both the input and output prices balances chimes with our view that inflation will fall sharply in the second half of the year. Indeed, goods inflation looks set to fall from 9.7% in May to almost 0 by the middle of 2024 as recent sharp falls in commodity prices continue to feed through into lower input prices. 

‘Lower inflation, combined with a tight labour market, will mean that households real earning should start to rise again in the second half of this year. However, much of this increase in real incomes will be offset by the surge in interest rates. As such, we expect the economy to continue to stagnate for another year. The big risk is that interest go tot 6% or higher, as financial markets expect, which would be enough to tip the economy into a recession.'