UK manufacturing at three month low in October

UK manufacturing activity dropped to a three-month low in October signalling a challenging start to the fourth quarter of this year as new COVID-19 restrictions come into force. 

UK manufacturing at three month low in October

According to the latest IHS Markit/CIPS purchasing managers’ index (PMI) manufacturing dropped to 53.7 last month from 54.1 in September and a 30-month high in August.

As England braces for a month-long lockdown, while Scotland awaits a decision on similar measures, renewed contraction over Q4 now seems inevitable.

The manufacturing sector has been less affected than the services sector by increased restrictions on activity, but it was still losing momentum even before the new national lockdown was announced in England.

Most elements of the survey were softer in October with output growth at a four-month low while still being at an elevated level. The growth of new orders slowed due to an easing back in domestic demand, as export orders rose to a 32-month high. Employment in the manufacturing sector fell at an increased rate.

Output and new orders continued to grow in the investment and intermediate goods sectors in October but contracted in the consumer sector. This contrasted with the consumer sector leading the UK economy’s bounce back in Q3 and supports the view that new restrictions and increasing caution will hold back consumer spending in the near term.

There were some signs of stock building in the manufacturing sector ahead of the Brexit transition arrangement ending on 31 December.

There was also evidence of manufacturing export orders being lifted by clients in Europe that were looking to secure supplies before possible disruptions resulting from the ending of the withdrawal agreement.

Howard Archer, chief economic advisor to the EY ITEM Club, commented: “There seems little doubt that a renewed national lockdown will cause the economy to contract again in the fourth quarter – and, very possibly, by an appreciable amount. The EY ITEM Club’s initial forecast is that there could be a GDP contraction of between 5-8% in the fourth quarter.

“Even before a new national lockdown in England – as well as varying measures announced so far in Scotland, Wales and Northern Ireland – the fourth quarter was looking much more challenging for the UK economy, and it was likely there would be a marked rise in unemployment as the furlough scheme drew to a close in October, even allowing for the Government’s latest, more generous job support measures. On top of that, business caution has been added to by uncertainties over whether the UK and EU will reach a trade agreement by 31 December.

“There were already signs of the economy losing momentum with local restrictions being imposed. Consumer confidence fell in October, according to GfK, the CBI distributive trades survey indicated a softening in retail sales, the Lloyds business barometer showed weakening business confidence, and the flash October purchasing managers surveys showed slowing manufacturing and, especially, services activity. Furthermore, the services PMI showed falling new business.”

He added: “The EY ITEM Club doubts that any upcoming GDP contraction will be as much as April and over the second quarter. Hopefully, experience has been gained in keeping activity going.

“People and companies have got used to home working, while some workplaces and offices have been adjusted to meet COVID-19 health and safety requirements. This includes construction sites and manufacturing plants, which the Government has stressed it wants to keep operating through the new lockdown.”

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