Manufacturing growth improves, in part, as business optimism rises to six year high

Lontra new advanced manufacturing facility

The upturn in the UK manufacturing economy strengthened during November, as rates of growth in output and new business accelerated, and the downturn in employment slowed. Business optimism about the year ahead has also risen to a six year high.

The data was released today by the IHS Markit/CIPS Purchasing Managers’ Index. The data also revealed that ahead of the Brexit transition period coming to a finish at the end of the year, many companies stockpiled raw materials and saw a rise in export business as EU-based clients brought forward orders. New work also flowed in from Asia and the USA, according to the index.

Fhaheen Khan, Senior Economist at the manufacturers organisation, Make UK, said: “This points to a continued, yet subdued, expansion of the manufacturing sector as orders slowly return following the easing of restrictions. It also appears the alarm bells that took hold of manufacturers just before the first EU-exit deadline have returned in some capacity as businesses sought to stockpile. While it may be rational in today’s uncertain environment, it is creating the impression that manufacturing is performing well just before the transition period ends.

“It is clear the uncertainty is felt by both sides as EU manufacturers are also stockpiling to some degree resulting in a short-term boost to business for UK manufacturers too. However, such actions are generally followed by a period of depressed activity as manufacturers begin to service future orders using these very stockpiles.”

Although the rate of expansion in manufacturing was solid, it was also weaker than those seen through the third quarter of the year. The upturn in production volumes was linked to companies re-opening following COVID-19 closures earlier in the year and improving demand.

November saw a marked divergence between different sectors within manufacturing. The intermediate and investment goods industries both registered robust and accelerated growth of output. In contrast, the downturn in the consumer goods sector continued, with back-to-back decreases in both production and new business.

Rob Dobson, Director at IHS Markit, which compiles the survey, said: “Growth of the UK manufacturing sector picked up in November, temporarily boosted by ‘Brexit-buying’ among clients and the ongoing boost from economies re-opening following lockdowns earlier in the year. The effects were strongest felt among firms supplying inputs to other companies as warehouses were restocked,
and among producers of investment goods such as machinery and equipment. The weak point was the consumer goods industry, which saw lower output and new order intakes amid depressed household sentiment caused by mounting job losses and the UK re-entering lockdown.

But this good news was tempered by the news that more jobs have been lost in manufacturing, with job losses recorded for the tenth consecutive month in November. Reductions to staff headcounts were attributed to redundancies, cost reduction initiatives, staff restructuring, natural wastage and the ongoing impact of the COVID-19 pandemic. This was despite the rise in business optimism.

Higher levels of input buying also increased the pressure on already strained supply-chains, leading to raw material shortages and a marked deterioration in vendor performance. Longer supplier lead times were also linked to the ongoing effect of the pandemic, tighter restrictions (including renewed lockdowns), transport disruptions and shipping delays.

Input cost inflation accelerated to a two-year high in November. Companies responded by raising their average selling prices to the greatest extent in the year-so- far.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, added: “Manufacturing companies were running at full pelt in November with a continuing flow of domestic orders and export business rising for the fourth month in a row. Companies in the UK, Europe and the US were buying at speed to meet the Brexit deadline, whilst covid-related supply chain disruption and increased safety measures for returning staff continued. As a result, an extended list of shortages started to appear along with the highest cost inflation for two years and disappointing delivery times last seen when the pandemic first hit.

“Though the Brexit bounce continued for some, reluctant spending amongst shoppers meant thatthe consumer goods sector fell behind and the level of orders and production dropped. The impact of redundancies in the UK has affected consumer confidence though manufacturing positivity for the year ahead was the highest since September 2014.

“Panic buying aside, there was little in the figures to suggest a sustainable recovery once we move into 2021. Job shedding continued last month and new business could drop off a cliff in January as potential border disruptions are thrown into the mix. The prospect of an extended recession continues to hover above the UK economy until clarity around a Brexit deal is reached and hopes for an effective vaccine supply chain are realised bringing much-needed normality.”