UK manufacturing output and new orders deepen: Significant employment implications The UK continues to experience a sharp slowdown in manufacturing, with the Purchasing Managers’ Index (PMI®) falling sharply to 46.9 in February, its lowest level in 14 months. Although this was a slight decline from the initial estimate of 46.4, the figure remains well below the 50.0 mark, indicating continued contraction in the sector.
Why manufacturing activity is slowing
Concerns over weak demand, coupled with increased cost pressures, are key factors behind the ongoing slowdown. Weak domestic and external demand has led to companies cutting production and new order volumes. Firms have been grappling with weak customer confidence, both domestic and overseas, as well as supply chain issues that have impacted operational efficiency.
In the domestic market, pressures have been mounting due to rising costs and customers’ unwillingness to spend. Political changes in last year’s fall budget also affected business decisions, prompting companies to cut production.
Supply chain issues impact production
Despite weak demand, supply chains continued to face severe pressure in February. Manufacturers experienced delays in shipping materials, due to a variety of issues such as the Red Sea crisis, port disruptions, supplier capacity constraints, and customs delays. All of these factors led to longer delivery times from suppliers, impacting companies’ ability to fulfill orders on time. Despite the continued decline in orders, supply chain pressures remained, hampering companies’ ability to adapt to current conditions.
“Cost and demand considerations have also encouraged a reduction in purchasing activity and inventories, with the tough economic backdrop putting manufacturers on an increasingly defensive footing. Input costs are rising at the fastest pace in more than two years, as suppliers anticipate increases in their wages and National Insurance costs.
The impact of the slowdown on the industrial labor market
As the slowdown in the manufacturing sector deepened, there were significant repercussions on the labour market. According to the data, the manufacturing sector recorded the largest job losses since mid-2020. While employment has continued to decline over the past five months, February saw the worst rate of job losses since May 2020. Companies linked the decline in jobs to weaker demand for products, prompting them to cut temporary staff and reduce the working hours of some workers. Companies also chose not to replace employees who left, whether through retirement or for other reasons.
SMEs were the most affected of the large companies, experiencing the fastest rate of job cuts at 56 and 10 months respectively. But large companies were not isolated from this trend, implementing significant staff cuts as well. It is clear that companies were looking to cut costs amid weak demand.
Demand falls both domestically and internationally
The UK saw a decline in new orders from both domestic and overseas customers. In the domestic market, a combination of higher costs and lower customer spending contributed to a reduction in new orders. While in overseas markets, there was a significant decline in new orders from countries such as Brazil and Germany, as well as the Middle East and the US. At the same time, global markets were quiet, making it more difficult for companies to find new markets to grow their sales.
The sector most affected: Consumer goods
Not all sectors were equally affected by the slowdown, with the consumer goods sector being the most affected of the three sectors surveyed. This sector recorded the largest decline in output and new business, reflecting continued weak demand for this category of goods. Other sectors, such as intermediate and investment goods, also saw declines, albeit to a lesser extent.
Rising costs and their impact on prices
Continued increases in input and production costs have put price pressures on companies. Raw material and energy costs have been at high levels, which in turn has been reflected in higher purchasing prices. Despite companies’ attempts to stimulate demand by reducing prices for finished products, higher labour and tax costs have been driving up prices.
On the other hand, selling prices in February rose to their highest levels since April 2023, as companies attempted to pass on expected cost increases to customers. This trend was partly due to higher costs associated with the UK minimum wage and social insurance contributions.
Business optimism and outlook
Despite the difficult conditions facing the manufacturing sector, there are positive signs regarding business outlook. In February, optimism levels rose significantly, reaching a six-month high. Many companies attributed this optimism to new projects being worked on, as well as marketing initiatives and expanding diversification. There were also hopes that economic conditions would improve in the near future, which boosted sentiment within the sector. Challenges persist but there is a glimmer of hope
The UK manufacturing sector continues to face significant challenges amid weak demand and rising costs. However, there is a glimmer of hope on the horizon, as optimism about the future is emerging. Although the market situation is far from stable, companies are showing a willingness to improve their position by adopting new strategies and diversifying their businesses. This optimism represents a turning point in the recovery journey, although there is still a long way to go for companies as they seek to adapt to the ongoing changes in local and global markets.
