Brexit hit to business confidence including manufacturing looks worse than early indications suggested

1st August 2016

The UK Purchasing Managers’ Index fell to its lowest level since early 2013 at start of third quarter. The UK Manufacturing PMI stood at 48.2 in July down from earlier flash estimate of 49.1.

The market has been hit by pre and post referendum uncertainty although a weaker sterling exchange rates has aided new export order growth. The data was collected on July 12 and 26th.

The UK manufacturing sector started the third quarter on a weaker footing. Levels of production and incoming new orders both contracted, as the impact of increased business uncertainty on the domestic market offset an exchange rate supported increase in new export business.

At 48.2 in July down from 52.4 in June, the seasonally adjusted Markit/CIPS Purchasing Managers’ Index fell to its lowest level since February 2013. The reading was also below the earlier flash estimate of 49.1. This is only the second time since early 2013 that the PMI has fell to a sub 50.0 level.

The decline in production was the steepest since October 2012, with contractions across the consumer, intermediate and investment goods sectors. The intermediate goods sector saw the sharpest drops in both output and new orders.

Investment goods manufacturers also saw a moderate decrease in new work received during July, although this partly reflected some payback from June’s marked increase. There was, a modest increase in new orders to consumer goods producers, albeit at a substantially reduced pace of growth than in the prior survey month.

The level of incoming new export orders in the UK manufacturing sector rose for the second successive month in July. The latest expansionwas aided by both the recent depreciation of the sterling exchange rate and efforts by companies to secure new contracts. Export business rose moderately at intermediate and investment goods producers, but fell for the second time in three months in the consumer goods sector.

UK manufacturing employment decreased for the seventh straight month in July. Moreover, the rate of job loss was the second sharpest for almost three and a half years. Companies linked lower staffing levels to the contractions in output and new orders. There was also mention of natural wastage, restructuring, redundancies and outsourcing leading to job cuts.

Weaker inflows of new work and declining volumes of outstanding business also suggest that employment may fall further in coming months.

Purchase price inflation surged to a five year high in July, reflecting a sterling-induced rise in import costs and higher metal and commodity prices. Part of the increase in costs was passed through to clients, however, as selling prices rose at the quickest pace in almost two years

Rob Dobson, SeniorEconomist at Markit, which compiles the survey said: “The final PMI came in at 48.2, down from the earlier flash print of 49.1. The pace of contraction was the fastest since early2013 amid increasingly widespread reports that business activity has been adversely affected by the EU referendum. The drops in output, new orders and employment were all steeper than flash estimates.

“The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors, although exporters did report a boost from the weaker pound. However, the improvement in exports was less marked than previously estimated, blamed in part on sluggish overseas demand. The downside of the currency was an upsurge in input price inflation to a five year high on the back of rising import costs.

“The weakening order book trend and upswing in cost inflation point to further near-term pain for manufacturers. On that score, the weak numbers provide powerful arguments for swift policy action to avert the downturn becoming more embedded and help to hopefully play a part in restoring confidence and driving a swift recovery.”

David Noble, Group Chief Executive Officer at the Chartered Institute of Procurement & Supply said:

“Purchasing activity took a backwards leap with the sharpest drop since March 2013, as falls in both output and new orders battered the sector.

“Though these falls were not as marked as those seen during the Great Recession in 2007-2008, the drop was harsher than expected. The overall index was at its lowest since February 2013 and lower than reported by the recent flash PMI, which measured the effect of continuing uncertainty and the immediate impact of the EU referendum on the UK economy.

“Purchasing prices rose at levels not seen for half a decade, with SMEs bearing the brunt of rising input prices while larger corporates were more able to cope. And though export orders rose for the second month in response to the weaker pound, this was not enough to sustain the sector or make up any shortfall from the sluggish domestic market.

“After seven months of modest drops, employment figures showed an entrenchment in uncertainty with a sudden deterioration the second sharpest drop in almost three and a half years, as businesses chose redundancy and restructuring to secure themselves against more possible bad news ahead. Without new orders coming through, this downward trajectory is likely to get worse, at least in the short term.”

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