UK manufacturing downturn continued in August

CIPS said a weak domestic market and elevated inflationary pressure affected order books in August, leading to a sharp retrenchment in new work received and lower levels of production. However, the rate of decline in output was noticeably slower than one month ago, as a number of firms diverted spare capacity towards completing existing contracts. Backlogs of work declined sharply. August data indicated that the downturn remained broad-based by sector. New orders declined across the consumer, intermediate and investment goods sectors. Output also fell at producers of consumer and intermediate goods. In contrast, the capital goods sector bucked the trend of lower output, to record an increase for the first time in five months. On the prices front, August saw output charge inflation hit a further series record high the recent trend in the Output Prices Index suggesting a noticeable increase in cost inflationary pressure during mid-2008. The rate of increase in average input costs eased slightly from the previous month’s peak, but remained well above its long-run average. Companies attributed rising purchase prices to the high cost of energy, food products, fuel, metals and oil. However, there were some reports that recent declines in the cost of certain commodities – including oil and metals – were starting to filter through to manufacturers. Conditions in the labour market remained weak in August, with job cuts reported for the fifth successive month. The downturn of the global economy reduced the level of new export orders placed with UK manufacturers who reported lower levels of new business from clients based in mainland Europe and the US. Purchasing activity declined to the greatest extent in over nine-and-a-half years in August as elevated cost inflation led a number of firms to reduce non-essential expenditure. Stocks of purchases and finished goods both fell. CIPS director of professional practice Roy Ayliffe (pictured) said that although the manufacturing economy improved marginally from July’s nine-and-a-half year low, the sector was still declining but at a slower rate. He went on: “Purchasing managers reported that the weak domestic market and inflationary rises added further pressures. In particular, costs continued to surge on the back of high energy, food and fuel prices while the weak sterling also pushed up the cost of imports. Rob Dobson, senior economist at Markit Economics, said: “The downturn in manufacturing continued into August, as a lacklustre domestic market and high inflationary pressures eroded confidence at businesses and households alike. These factors weighed heavily on order books, while the ensuing global economic slowdown meant there was no support from the external sector. The rate of contraction in output eased noticeably but, being driven by an upshot in the capital goods sector where new order volumes are especially depressed, this probably reflects the excessive weakness of the previous month as opposed to any near-term improvement in performance. The stagflationary binds that are tying the MPC’s hands are still in place, making an imminent rate movement unlikely, but the ensuing economic slowdown and recent commodity price decreases should open the door to a cut later in 2008.”