UK manufacturing shows further signs of slowing

UK manufacturing growth slowed slightly in February, according to a survey of managers in the sector published on Thursday, with a major fall in the output balance to its lowest level in almost a year.

The IHS Markit CIPS manufacturing purchasing managers' index fell to 55.2 in February from 55.3 in January, which took the index to its lowest level since June 2017, though was not as bad as the 55.0 the market had expected.

Slightly lower production growth was reported across the consumer, intermediate and investment goods sub-sectors but new order growth picked up pace as domestic demand strengthened and new export business continued to climb, though at moderately slower rate.

Output growth slowed despite improving demand and employment rising for the nineteenth month in a row, but price pressures remain elevated, easing only slightly in the month.

February’s manufacturing PMI suggests that the sector has lost some momentum in the first quarter, said Capital Economics.

"What’s more, there were signs that the boost to exports from the drop in the pound is fading too, with the export orders balance falling on the month. And on the basis of past form, the average of the output balance in Q1 so far points to quarterly manufacturing output growth of around 0.5%, much weaker than Q4’s 1.3% expansion."

Capital's Paul Hollingsworth said overall industrial production should still receive a boost in the quarter from the unwinding of the drag from the closure of the Forties oil pipeline in December.

Growth in the manufacturing sector is moderating, said Pantheon Macroeconomics, now that the recovery in the Eurozone has started to lose a little pace and more than 18 months have elapsed since sterling’s huge depreciation.

"The modest fall in the PMI masked another significant drop in the output balance to just 54.3 in February—its lowest level since March—from 55.8 in January," the economists said.

On past form, its average in the first quarter so far is consistent with quarter-on-quarter growth in manufacturing output slowing to 0.4%, from 1.3% in the fourth quarter of last year, Pantheon said.

"Output growth might recover a touch over the coming months, given that the new orders index increased to 57.5, from 56.2 in January. But sharp price rises threaten to subdue demand; the fall in the output price index to 59.1 in February, from 61.4 in January, only returned it to its 12-month average.

"All told, the manufacturing sector looks set to support GDP growth less this year than last, bringing a high risk that GDP growth undershoots the MPC’s expectations."

Duncan Johnston, UK manufacturing industry leader at Deloitte, said this fresh data continues the downward trend seen in recent months, yet he said sector has got off to a stronger start in 2018 than many expected.

“While manufacturers have been affected by rising input prices, export orders continue to benefit from a weaker pound and a buoyant global economy. Manufacturers also commented that domestic demand had strengthened, leading to a more positive outlook for the coming months, and giving them the confidence to take on more staff."

This is also reflected in other surveys, he said, with the ONS data for the end of last year showing the manufacturing sector grew by 1.3% in the fourth quarter, and the CBI Industrial Trends survey last week pointing to further growth on order books.

“Consensus forecasts point to a slowdown in inflation, which, combined with record levels of employment could start to push wages higher. This in turn would benefit consumer spending. Given the strength of the global economy and potential for improving demand in the UK, the outlook for UK manufacturing remains robust.”