Output and new orders are experiencing contractions at levels rarely witnessed except during crisis periods like the COVID pandemic and the global financial crash of 2007-2008. This situation is being compounded by a challenging combination of escalating interest rates and inflation.
The British manufacturing sector is facing its most challenging month since the initial stages of the COVID-19 pandemic, marked by a significant decrease in orders.
The manufacturing purchasing managers’ index, a key gauge of economic activity, has reached a 39-month low at 43.0. With a reading below 50 indicating contraction, this marks the 13th consecutive month without recorded growth.
The decline is being attributed to increasing interest rates both domestically and internationally. According to Rob Dobson, the director at S&P Global Market Intelligence, the contraction in output and new orders is occurring at rates that are seldom witnessed except during crisis periods like COVID and the global financial crash of 2007-2008.
In August, manufacturers scaled back purchasing activity, inventory levels, and staffing as they aimed to manage costs, safeguard margins, and operate in a more streamlined and efficient manner, Dobson explained.
According to Glynn Bellamy, the UK head of industrial products for KPMG, the expected delay between interest rate hikes and their complete effect on the global economy is fostering a sense of caution regarding investment and employment choices.
He also mentioned that the British manufacturing industry is characterized by high diversity, resulting in varying levels of performance across different sectors.
Make UK, an organization that represents manufacturers, suggests that the PMI reading is indicative of an unfavorable mix, where elevated inflation erodes consumer purchasing power and rising interest rates have a dampening effect on demand.
The senior economist of the organization, Fhaheen Khan, cautioned:
“Policymakers and those responsible for setting interest rates must consider the potential consequences of increased unemployment. With prices remaining high for many consumers, pushing this too far could lead to income losses that would impact a significant portion of the population.”
As per S&P Global and CIPS, the organization conducting the survey, the pace of decline in British manufacturing has intensified to its most rapid in a year and is among the swiftest in history.
Nonetheless, businesses within the sector are still upholding a positive perspective. Optimism has reached a peak of four months, with 56% of companies anticipating growth in the upcoming year, buoyed by prospects of a market resurgence.
Mr. Dobson also mentioned a silver lining to the downturn: the costs of energy, fuel, metals, and rubber are decreasing. He stated:
“[This] should contribute to a reduction in goods price inflation in the upcoming months.”