U.K. Manufacturing Slows to a Crawl

According to HIS Markit, the U.K. manufacturing sector has unexpectedly slowed down during March. UK’s factory Purchasing Managers Index (PMI) went down to 54.2. It was 54.5 last month.

However, it is still above the critical level of 50 which divides whether the manufacturing sector is expanding or contracting. The expectations of economists were for U.K manufacturing to increase to 55. The long-run average of the PMI is 51.6.

Joshua Mahony, market analyst at IG, said, “UK manufacturing took another step backwards in March, with today’s PMI reading showing growth in the sector slowed for a third consecutive month. The boost of a weaker pound appears to be on the wane.”

According to Markit senior economist Rob Dobson, manufacturing has indeed lost some momentum, and it will likely persist in the 2nd quarter. Dobson also noted that the slowdown in manufacturing was mostly caused by firms producing consumer goods. Manufacturers making investment goods such as machines were still enjoying significant growth.

Dobson, said, “High costs and weak wage growth are sapping the strength of consumers with rates of expansion in output and new orders for these (consumer) products slowing further.”

ING economist James Smith, said, “Whilst the near-term outlook for manufacturing looks encouraging, it’s possible that Brexit uncertainty will start to weigh more heavily on sentiment. Given the fairly contrasting negotiation strategies outlined by U.K. and European leaders last week, the risk of reduced or altered access to European markets may begin to feel more real. The fall in the value of the pound post-Brexit is helping new orders. But that currency effect comes at a price.”

The weak pound has increased inflationary pressure on the economy. The fast-rising inflation is creating a situation of households’ income not showing any real growth. Data also shows British households were saving a tiny percentage of their income and the percentage is the lowest ever since this statistic was collected half a century ago.

Factories are not hesitating to increase prices as input prices increases. March data shows that factory gate inflation grew by 3.7 %.

Last year, Britain’s gross domestic product was 1.8% which was the 2nd fastest rate among developed nations.

Duncan Brock, director at Chartered Institute of Procurement & Supply, said, “The reduced buying power of the pound has led to the 11th consecutive rise in input costs with consumers feeling the effects in the form of higher prices on the high street. Supplier delivery times have also begun to lag, clogging up the supply chains of British manufacturing. With the rate of new order growth showing early signs of easing in March, manufacturers must act to ensure they are not locked into costly contracts. Now is not the time for manufacturers to rest on their laurels.”

The pound fell 0.3% against the dollar and 0.6% against the euro in response to this dismal data.

On the bright side, business sentiment increased to a 10-month high. 52% of the companies surveyed predicted that their production would increase within 12 months. Only 6% of respondents expected their output to decrease.