UK manufacturing is ‘stagflating’

Today’s (2 June) data from the Chartered Institute of Purchasing and Supply (CIPS) Showed that the growth of UK manufacturing output ended in May following further falls in new orders and job cuts. And output charge inflation hit a further high. The data indicated that a near three-year period of sustained expansion in UK manufacturing production had come to an end, following a further decline in incoming new orders. Inflationary pressures were still building in the sector, with sharp rises in purchasing prices which were passed onto clients in the form of higher charges. Output prices have now increased in each of the past 34 months, by far the most sustained period of charge inflation since this particular series of data has been collected. At 50.0 in May, the Purchasing Managers’ Index (PM®) failed to post a reading above the neutral mark, a level indicative of stagnation, for the first time since July 2005. May data shows that the latest reduction in incoming new orders was experienced across the consumer, intermediate and investment goods sectors. New work received has fallen in each month this year, as the seasonally adjusted New Orders Index recorded a reading of 48.3 – reflecting a general reluctance amongst clients to commit to new contracts in light of the uncertain investment climate. Weak domestic market conditions were the main drag on total order books, as the level of new export orders increased slightly during May. Where a rise in overseas demand was reported, this was mainly reflective of new business-wins in mainland Europe and China. With new orders falling again in May, UK manufacturers reported significant advancement in reducing levels of work-in-hand in order to prevent output from falling. The rate of contraction in outstanding business was identical to the series records of January 2008 and May 2005. After rising slightly in each of the previous two months, employment in the UK manufacturing sector fell in May. The Employment Index posted a reading of 49.2, as lower levels of incoming new work and a more subdued trend in output led firms to cut non-essential staff. Although easing slightly from April’s high, the rate of purchase price inflation remained elevated and comfortably above its long-run average. Rising costs were linked to higher prices for oil, fuel, transportation, base metals and food products. In turn, companies continued to pass on part of the increase in their output costs. The seasonally adjusted Output Prices Index recorded a reading of 62.0 – the most sustained period of charge inflation in the series history. May saw purchasing activity decline at the fastest rate for three years. The seasonally adjusted Stocks of Purchases Index posted a reading of 48.4,as a number of companies initiated stock-reduction initiatives in response to declining levels of incoming new work and keeping purchasing costs to a minimum. Manufacturers blamed the deterioration in average supplier performance on shortages of certain raw materials and insufficient capacity at transportation and distribution companies. Vendor performance has now deteriorated in each of the past fifty-nine months. Roy Ayliffe, Director of Professional Practice at CIPS, said: “Following a further decline in new work for UK manufacturing firms, May marked the end of a three year period of sustained growth for the sector and entry into a period of ‘stagflation’ - no growth and high inflation. The weak domestic market proved the Achilles heel of manufacturers, while modest gains in new work from Europe and China were reported. Furthermore, any hopes raised by increases in employment in March and April were dashed in May as jobs were cut. “Purchasing managers in the sector continued to face record inflationary pressures, which they tackled by curbing input buying activity and passing soaring fuel, transportation and food costs on to clients.”