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UK manufacturing sector shrinks again in September

By Michele Maatouk

Date: Monday 02 Oct 2023

UK manufacturing sector shrinks again in September

(Sharecast News) - The UK manufacturing sector continued to shrink in September - albeit at a slower pace - as rising interest rates and the cost-of-living crisis took their toll.
The S&P Global/CIPS purchasing managers' index printed at 44.3, up slightly from August's 39-month low of 43.0 and above the flash estimate of 44.2, but still among the weakest readings seen in the last 14 years.

A reading below 50 indicates contraction, while a reading above signals expansion.

Rob Dobson, director at S&P Global Market Intelligence, said: "September saw the manufacturing sector still mired in contraction territory, as weak conditions at home and abroad hit new order intakes and led to a further scaling back of production volumes. The cost-of-living crisis and recent rapid rise in interest rates are taking their toll, according to producers, raising the possibility of the broader UK economy slipping back into contraction during the second half of the year.

"The downturn is being felt throughout the manufacturing sector, with demand falling from both households and businesses. The resulting rise in caution at manufacturers is driving risk aversion and shifting their focus towards margin protection and cost control, highlighted by further cuts in employment, purchasing and inventories. These all point to companies battening down the hatches in expectation of stormy conditions ahead."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "S&P's survey suggests that the recent pick-up in the official measure of manufacturing output - which rose by 1.7% on a three-month-on-three-month basis in July - is a false dawn. The output index recovered merely to 44.6 in September, from 44.1 in August. Production was temporarily supported by manufacturers depleting work backlogs at a pace exceeded in only five of the last 288 months. The 45.1 level of the export orders balance demonstrates that demand globally for goods is fading, but the relative weakness of the total orders balance - 42.1 in September highlights that domestic demand is declining rapidly too.

"What's more, the continued low level of the input prices index - it rose merely to 43.7 in September, from 43.0 in August - suggests that S&P's survey hasn't reflected any further weakness in demand that might be caused by manufacturers passing on higher oil prices to consumers."

As a result, Tombs still thinks that manufacturing output will fall back in the third and fourth quarters, but doubts "this drag will be quite powerful enough for the whole economy to go into a recession".


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