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UK factories struggle to boost output UK factories struggle to boost output
(about 4 hours later)
UK factories struggled to crank up output in May, hit by flagging overseas demand that has dented hopes that broader economic growth is bouncing back from a sharp slowdown at the start of the year. Worries about the unbalanced nature of Britain’s economic recovery intensified on Monday after news that UK factories struggled to crank up output in May amid flagging overseas demand.
A closely watched report on the manufacturing sector showed companies were scaling back hiring and remained largely dependent on consumer, domestic demand for what little growth there was last month. Economists said it underlined how much work remained to be done on the government’s ambitions of rebalancing the economy towards more manufacturing and exports. After a sharp slowdown for the UK economy at the start of the year, analysts hope growth has bounced back in recent months. But the latest news from manufacturers suggested the sector was being left behind in any turnaround despite the government’s ambitions to rebalance the economy towards more production and exports.
The headline activity reading on the Markit/CIPS UK manufacturing PMI modestly missed City expectations. It edged up to 52.0 from 51.8 in April compared with a consensus forecast for 52.5 in a Reuters poll of economists. The closely watched Markit/CIPS UK manufacturing PMI report showed companies had scaled back hiring and remained largely dependent on domestic demand, largely driven by consumers, for what little growth there was last month.
“We still see a bounce in overall GDP growth in the second quarter, but there is little evidence of such an improvement in manufacturing. As usual, the UK is reliant on services for growth,” said Elizabeth Martins, economist at HSBC.
The headline activity reading on the Markit/CIPS UK manufacturing PMI modestly missed City expectations. It edged up to 52.0 from 51.8 in April, compared with a consensus forecast for 52.5 in a Reuters poll of economists.
Related: Gloomy outlook in manufacturing sector as firms scale back investmentRelated: Gloomy outlook in manufacturing sector as firms scale back investment
Rob Dobson, senior economist at survey compilers Markit, said the strength of the pound was serving as a “double-whammy for economic growth” by constraining manufacturer’s export performance and also driving a surge in cheap imports. Rob Dobson, senior economist at survey compiler Markit, said the strength of the pound was serving as a “double-whammy for economic growth” by constraining manufacturers’ export performance and also driving a surge in cheap imports.
“Expectations of a broad rebound in UK economic growth during the second quarter of the year are called into question by these readings. Manufacturing looks on course to act as a minor drag on the economy, as the sector is hit by a combination of the strong pound and weak business investment spending,” he said.“Expectations of a broad rebound in UK economic growth during the second quarter of the year are called into question by these readings. Manufacturing looks on course to act as a minor drag on the economy, as the sector is hit by a combination of the strong pound and weak business investment spending,” he said.
Although the index has been above the 50-mark separating growth from contraction for 26 months, it has softened recently, echoing other indicators suggesting tougher market conditions for manufacturers. The trade group, EEF, on Monday reported that its sector has lost momentum in recent months, hit by the slowdown in North Sea oil and gas investment and a tough export market. Manufacturers lose momentum
The PMI report, compiled after the election, showed factory output continued to rise but at a slower pace than the previous month as the consumer goods sub-sector performed well. Output fell in intermediate goods, such as components and unfinished products. The pound had strengthened against other major currencies last month, boosted by a more decisive election outcome than investors had feared. But it weakened at the end of May on the back of growing market expectations the Bank of England will keep interest rates at their record low of 0.5% for the rest of this year. Monday’s manufacturing report reaffirmed that view and pushed the pound down to $1.5198 against the dollar, marking a return to its pre-election level.
Manufacturers said new business grew on the back of domestic orders while there was a drop in new work from abroad with manufacturers citing a relatively strong pound and soft global market conditions. Pound weakens
The report adds fuel to the debate over whether overall UK growth recovered in the second quarter after GDP edged up by 0.3% in the first quarter. But with manufacturing making up only a tenth of the economy, most focus will be on the PMI report for the much larger services sector, out on Wednesday. Although the PMI index has been above the 50-mark separating growth from contraction for 26 months, it has softened recently, echoing other indicators suggesting tougher market conditions for manufacturers. The manufacturing trade group, EEF, has cut its growth forecast for the sector.
“The economic recovery is very dependent on the services sector at present,” said Samuel Tombs, senior UK economist at Capital Economics. The PMI report, compiled after the 7 May election, showed factory output continued to rise but at a slower pace than the previous month as the consumer goods sub-sector performed well.
“Looking ahead, the manufacturing sector looks set to continue to struggle – it is unlikely that the full adverse effects of sterling’s recent appreciation have been felt yet. But given the manufacturing sector’s small share of GDP and the robust nature of the recovery under way in the services sector, the UK economy should still enjoy a year of robust overall GDP growth.” Manufacturers said new business grew on the back of domestic orders while there was a drop in new work from abroad. Hiring slowed to the softest pace for two years.
Manufacturers continued to expand their workforces in May but only at a marginal pace. “Modest increases in capacity at consumer and investment goods producers were partly offset by job cuts in the intermediate goods sector,” the report said.
Manufacturers did manage to raise their average selling prices for the first time in five months during May while average input costs continued to fall.
“Companies continued to report lower costs for a range of raw materials, but also noted that this had been partly offset by recent oil prices rises,” the report said.
The eurozone version of the manufacturing PMI showed factories in the single currency bloc managed modest growth in May. The headline reading came in at 52.2, up from April’s 52.0. Spain and Italy performed well but France and Germany struggled.The eurozone version of the manufacturing PMI showed factories in the single currency bloc managed modest growth in May. The headline reading came in at 52.2, up from April’s 52.0. Spain and Italy performed well but France and Germany struggled.