Home News UK Factory Growth Slows to 17-Month Lows in April

UK Factory Growth Slows to 17-Month Lows in April

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By: Adrian Moore – Forex Focus

Slowdown in business activity pushes Bank of England to pause again in May.

Business activity in the United Kingdom’s manufacturing sector continued to slip in April, after peaking in November of last year. The weakening in manufacturing activity was led by multiple factors, including a decline in business optimism and slower growth in output and new orders and employment. The IHS Markit/CIPS UK Manufacturing PMI (Purchasing Managers’ Index) in the UK fell to 53.9, missing market expectations of 54.8, after a downward revision to 54.9 the previous month. In spite of missing analysts’ targets, the manufacturing PMI marks the 21ststraight month of expansion, with the 50-point mark separating the industry’s growth from contraction.

About the survey

The UK Manufacturing PMI is reported by Markit and is derived from a survey of 600 companies in the manufacturing sector. The broad index is made up of five individual categories, namely new orders, output, employment, suppliers’ delivery times and stock of items purchased, with individual weightages ranging from 10 to 30 percent.

Key takeaways from the survey 

  • Business optimism dropped to the lowest in five months on concerns related to trade barriers following Brexit and the broad economic climate in the region.

  • Employment in the manufacturing sector increased in April, although the rate of job creation eased to the lowest in 14 months. Job losses were reported in the consumer-goods sector for the first time since February 2017.

  • Growth in output and new orders dropped to five-month lows in spite of registering an increase by producers of consumer, intermediate and investment goods.

  • Prices, too, continued to fall, with both input and output inflation skidding to multi-month lows.

  • Input price inflation eased to nine-month lows in spite of rising in April, on the back of higher commodities and raw-material prices. Likewise, output prices declined for the third month in a row, to the lowest level since August of last year.

  • Growth in exports fell to the lowest level in 10 months, with intermediate and investment goods leading the fall, which were partly offset by strong growth in the consumer-goods sector.

To summarise, factory activity expanded at the slowest pace since November 2016 as a decline in work backlogs, rising inventory and supply-chain constraints added to the woes of the broad manufacturing sector, signalling a slowdown in output growth in the months ahead.

According to Rob Dobson, director at IHS Markit, “The start of the second quarter saw the UK manufacturing sector lose further steam. While adverse weather was partly to blame in February and March, there are no excuses for April’s disappointing performance. On this footing, the sector is unlikely to see any improvement on the near-stagnant performance signalled by the opening quarter’s GDP numbers. Looking ahead, the trend in manufacturing production is likely to remain subdued.”

Earlier this month, the monetary-policy committee of the Bank of England voted by a 7-2 majority to leave its benchmark interest rate, or the Bank Rate, unchanged at 0.5 percent, while they voted unanimously to maintain the stock of government bond purchases and non-financial investment-grade corporate bond purchases at £435 billion and £10 billion respectively. The central bank cited the slowdown in business investments due to Brexit-related uncertainties and subdued growth in household consumption as the key factors in shaping its decision and said that any future increases in the Bank Rate will be limited and carried out at a gradual pace.

According to the major economic numbers from the UK, annualised consumer inflation edged lower to 2.5 percent in March from 2.7 percent in February, the lowest in 12 months, as the cost of financial services and personal care slipped further into negative territory. The numbers have been steadily falling from the peaks of November last year, when the inflation rate was reported at 3.1 percent.

The unemployment rate, on the other hand, was unchanged at more than 40-year lows of 4.2 percent in the first quarter. The number of unemployed in the workforce declined by 46,000 from the previous quarter, while employment rose to its highest level in two and a half years.

Outlook

UK factories account for about a 10th of the overall economic output in the country. With Britain looking to completely exit the European Union in less than a year, the possibility of businesses kick-starting investments in the manufacturing sector look very bleak in the face of uncertainties surrounding the outcome of Brexit. The pace of decline in new orders and falling exports are only going to accelerate as the deadline approaches, unless the country can find alternate markets for their goods quickly.

The Bank of England, too, might adopt a wait-and-watch approach and not step in immediately, in spite of inflationary pressures building on account of a depreciating pound sterling—at least not until business confidence, which slipped below the 60-year average in the latest quarter, rebounds sufficiently.

 

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