Manufacturing ‘buckles’ under weak demand and high inflation

Latest data from the Chartered Institute of Purchasing and Supply (CIPS) led one economist to the conclusion that manufacturing had “buckled” in June. CIPS’s Purchasing Managers’ Index (PMI) fell sharply to its lowest reading since late 2001 when conditions in the sector were affected by the economic fallout from the terror attacks on the US. The new figures indicate that UK manufacturers face a restrictive combination of weak demand, especially from the domestic market, and intense cost inflationary pressure. Rates of increase for input costs and factory gate prices hit series record highs, with inflation of output charges having now broken new peaks through the first half of 2008. Companies scaled back production markedly in June, and to the greatest extent since December 1998, as domestic market conditions deteriorated further and demand from abroad slowed. Order books were reportedly hit by rising inflationary pressures and the high cost of credit, which led a number of clients to postpone or cancel non-essential expenditure. There were further reports that levels of new work received from the construction, retail and public sectors had fallen. Average input prices increased at the fastest rate in the sixteen-and-a-half year survey history, as soaring oil, energy and metal prices drove purchasing costs higher and led to an associated increase in factory gate prices. The latest Input Prices Index recorded a reading of 82.1, with manufacturers reporting higher prices for chemicals, food products, packaging, plastics and timber. There were also reports that the weakness of the sterling against the euro is continuing to push up the cost of raw materials imported from the Eurozone. Weaker operating conditions in the UK manufacturing sector filtered through to the labour market in June, as manufacturing jobs were cut at the sharpest pace since August 2005. June also saw the volume of uncompleted work contract at the fastest rate in the survey’s history. Roy Ayliffe, the CIPS’s director of professional practice (pictured) said: “After pointing to stagflation in May, purchasing managers in the UK manufacturing sector saw conditions worsen considerably in June to levels of contraction not seen since the immediate post-9/11 period. “Faced with a relentless onslaught of ever weaker domestic demand, slower global economic growth and record cost inflationary pressure, manufacturers scaled back production, which contracted at the most severe levels in nearly a decade. There was no good news for the sector’s labour market either, as the decline in order books led to a continued culling of jobs.” Rob Dobson, senior economist at Markit Economics, said the UK manufacturing sector had buckled under the weight of a brutal combination of inflation and weak demand. However, EEF Chief Economist Steve Radley, said that despite things becoming much tougher and firms more wary about the outlook, the sector had yet to pick up any serious signs of distress beyond those sectors closely linked to construction and the consumer which may have exacerbated these figures."