Sector’s slump adds to fears over recovery

The worst monthly PMI reading since September 2009 was blamed on a weaker domestic market, the slowest growth in export orders in eight months and the effect of extra public holidays.

The shock figures drove the pound lower and boosted government bond prices and increased speculation that the Bank of England will delay raising interest rates until the end of the year.

Andrew Goodwin, senior economic adviser to the Ernst & Young ITEM Club, said: “The manufacturing PMI has been dropping like a stone over the past few months and, with activity now barely growing, these results will trigger genuine concern about the sustainability of the recovery.”

He said the figures suggest “another soft reading” for GDP growth in the second quarter, following the meagre 0.5 per cent rise in the first quarter of 2011.

Howard Archer, chief UK economist at IHS Global Insight, described the showing as “hugely disappointing”. He added: “This indicates that the hitherto buoyant manufacturing sector is now faltering appreciably.”

Mr Archer said manufacturers are finding life more challenging as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand.

The Markit/CIPS index also points to a slowing down in global demand as export orders fell back markedly in May.

This could mean that “the global manufacturing rebound from the sharp drop in output suffered during the 2008-09 recession is now running out of breath”, said Mr Archer.

Manufacturing accounts for around 13 per cent of UK economic output.

Yorkshire has a strong manufacturing base, representing around 16 per cent of the region’s out-put.

The sector has been one of the few success stories during a slow return to growth after a recession that ended late in 2009.

Rob Dobson, senior economist at Markit, said: “The UK PMI suggests that manufacturing has moved from rapid expansion to near-stagnation.”

The Master Cutler, who speaks for the manufacturing industry of South Yorkshire, said “one thunderstorm does not spoil a summer” when asked about the survey.

Bill Speirs added: “Manufacturing has greater longevity than a four-week period. Manufacturing in Sheffield is about nuclear and aerospace, which are long-term.”

He was not surprised that domestic market was weak, given the high level of unemployment and general uncertainty about the economic outlook.

Prof Speirs said: “People are just keeping their hands in their pockets, rather than spending. I think it’s going to be a long, slow climb.

“Growth is going to be difficult to achieve. I don’t believe it will mop up the unemployment spill-out from the public sector.”

The EEF manufacturers’ organisation is set to release its quarterly survey of members next week. Andy Tuscher, regional director, said it will also show some softening in the sector.

But while the domestic market remains flat, he said his members are still seeing an export-led recovery.

The EEF survey will also show that industry vacancies are at an all-time high. Mr Tuscher said manufacturers are “cautiously optimistic”, adding: “You don’t recruit if things are dropping off.”

He said weakening demand from countries like Brazil, Russia, India and China “could signal a choppier outlook for the rest of the year”.

Mr Tuscher added: “We are hoping there could be a strong rebound but only time will tell.”

STEADY AS IT GOES FOR MANUFACTURING

MANUFACTURING is steady in Sheffield and steady in the right direction, according to the Master Cutler. Bill Speirs said South Yorkshire companies are successful at competing on an international stage.

“There’s world competition but we are not bad at dealing with that,” he said. “We have quality in Sheffield. People want engineering products we have the expertise to make.”

Prof Speirs added: “In South Yorkshire we are not doing so bad. But it’s a long-term process. Things don’t just magically appear. Engineering requires technology, design, getting in orders and processing. It’s not an overnight phenomenon.”