Sector slump eases but pain set to go on

British manufacturer JCB
British manufacturer JCB
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THE slump in Britain’s manufacturing sector eased sharply during August but tough conditions for factories look set to persist, new data show.

After a severe contraction in July, last month’s Markit/CIPS purchasing manager’s index (PMI) rose to 49.5 from 45.2 in July. However, that was still below the 50 mark which separates contraction from expansion.

Economists said the reading was much better than expected, but added the sector still faced considerable challenges as Europe and the global economy slow.

“At best the survey shows that manufacturing activity remains stagnant in what is otherwise a flat economy,” said Yorkshire Bank economist Tom Vosa.

Manufacturing production fell for the second consecutive month in August, although the decline was shallower than that seen in July.

Major Yorkshire manufacturers including Huddersfield landscape products group Marshalls and Thirsk-based structural steel firm Severfield-Rowen have announced cost cuts in recent weeks as tough conditions persist.

Last week Marshalls revealed the closure of its Maltby paving plant in South Yorkshire, affecting 50 jobs, owing to weak volumes. That followed the closure of a plant in Derbyshire and capacity taken out across the business.

Last month Severfield, which supplied the steel for the London 2012 Olympic stadium, announced the merger of three businesses to boost efficiency.

“It links right back not just to the UK economy but the European and global economy,” said Severfield chief executive Tom Haughey at the time. “At the moment it does not feel very good.

“What we’re doing is making ourselves as fit and as competitive as possible to endure all of 
this.”

Manufacturing, which comprises about 12 per cent of the economy, saw new work hold broadly steady on July, after four months of contraction.

Companies reported a “modest” increase in work from domestic clients.

The rate of decline in new export orders also eased sharply, despite weak demand from Europe.

Margaret Wood, Yorkshire chairman of the Institute of Directors, said: “We’ve seen that slow down, whether that’s down to a poor summer or just the Olympics.

“Perhaps it will start to pick up, but there seems to be a reluctance to invest, and without that investment, manufacturing is contracting.”

Rob Dobson, senior economist at Markit, said while the survey was “heartening”, manufacturing was still “a fragile sector facing enormous headwinds”.

“Overall demand remains too lacklustre to provide an imminent and sustained recovery, with investment spending still weak and domestic austerity ongoing,” he said. “Long-unsatisfied hopes that the manufacturing sector could export its way back to health also remained jilted by the marrying of a downturn in our largest export market to the onset of softer global economic growth.”

A separate survey, published hours earlier by manufacturers’ organisation the EFF, found confidence among manufacturers has slumped in the past three months. The balance of responses on output over the past three months fell to its lowest level since the fourth quarter of 2009 and the orders balance was the weakest since the first three months of 2010.

“The weaker global outlook precipitated by the ongoing economic challenges in Europe has clearly hit home,” said EEF chief economist Lee Hopley. “Pockets of growth still remain in some sectors, but overall confidence appears to be draining away.”

The EEF found weaker output balances in all UK regions, with Yorkshire and the Humber’s balance of 14 less than half the balance recorded in the prior three months. All regions expected to record growth in output over the next three months, but Yorkshire firms reported flat expectations on orders and employment.

However, two bright spots in the Markit/CIPS PMI were employment and input costs. Factory employment rose slightly in August for the second successive month. But while payroll numbers grew at small firms, big manufacturers continued to cut jobs.

Input costs declined for the third month running in August, the survey showed, reflecting lower metal and plastic prices.

However, the rate of deflation eased sharply, mainly because of higher oil prices. Firms continued to hike prices in an effort to claw back margins lost earlier in the year, the survey showed. Factory gate prices have now increased for the past 34 months, the survey said.

But pricing inflation was only “modest” as strong competition and weak demand hamstrung firms’ pricing power.

IHS Global Insight economist Howard Archer said manufacturers are being hurt by low European demand, the strong pound and recovering oil prices.

“Eurozone economic weakness, in particular, is limiting overall foreign demand for UK manufactured goods,” he said.

“In addition, exporters have had to cope with the hit to their competitiveness from a relatively elevated pound.

“And while manufacturers are being helped by softer input prices, the rate of decline slowed appreciably in August and they will be concerned by the recent overall marked rally in oil prices.”

Another QE round unlikely

ECONOMISTS said an immediate increase in asset purchases or quantitative easing (QE) looks unlikely given the better PMI figures.

IHS Global Insight economist Howard Archer said the survey reinforced the view that the Bank of England would hold monetary policy steady when it meets this week.

“With the Funding for Lending Scheme still in its 
early stages and July’s extension to quantitative easing due to run through to early November, it would likely need an extremely weak set of purchasing managers’ surveys this week to prompt the MPC (Monetary Policy Committee) into further action at this stage,” he said.