UK manufacturing falters over interest rate rise fears

Journalist and contributor, Accountancy

2 Aug 2018

The UK manufacturing sector has had its weakest month in more than year, according to the latest IHS Markit/CIPS report, following concerns about an imminent interest rate rise

The UK Manufacturing Purchasing Managers’ Index (PMI) was 54.0 last month with weaker increases in both output and new orders and with intermediate goods production falling for the first time in two years.

The seasonally adjusted PMI was down from 54.3 in June and well below the highs achieved around the turn of the year, although the report points out that the PMI remains ‘comfortably above its long-run average of 51.8'.

July saw the weakest rate of expansion in UK manufacturing output in 16 months, as production growth was affected by a concurrent easing in the pace of increase in new orders. The domestic market was the main focus of the slowdown in new business growth, as new export work increased at the fastest pace for six months.

‘The softer growth patch of the UK manufacturing sector continued at the start of the third quarter. July saw slower rates of expansion in both output and new orders, as weaker growth of new work from domestic sources offset a stronger increase in new export orders. Price pressures also remained elevated as a strong increase in average input costs led to the steepest rise in selling prices since February,’ say the report’s authors.

Rob Dobson, director at IHS Markit, said the manufacturing was experiencing a contraction in intermediate goods production despite good output growth.

‘The July survey data also shows that the performance of the sector is becoming more uneven, with solid output growth in the investment goods industry being largely offset by intermediate goods production contracting for the first time in two years. As the intermediate goods sector supplies other manufacturers, taken alongside weaker growth of total new orders and a drop in business confidence to a 21-month low, this all suggests industry is unlikely to exit this soft patch in the near future,‘ he said.

The news sparked concerns that a possible interest rate rise by the Bank of England may make things difficult for struggling companies and Dobson urged the Bank to take a cautious approach.

‘The financial markets still seem to have an interest rate increase nailed on for August. However, if the combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored in the larger service sector, the Bank of England’s decision will be far from unanimous and they may even yet find some cause for pause,’ he said.

But, with inflation at 2.4%, the BoE may have no choice but to hike rates to stem rising prices and pundits predict that the BoE’s Monetary Policy Committee will raise the base rate from 0.5% to 0.75%.

Meanwhile the PMI report for the construction sector bucked the general subdued trend, with impressive growth being fuelled by residential house-building and commercial developments.

The July construction PMI was up 55.8 in July compared to 53.8 in June, a finding that surprised many experts.

'House building was the bright spot for construction growth in July, alongside a stronger upturn in commercial development projects. Residential activity and commercial work both increased at the sharpest pace since December 2015,’ said Tim Moore, Senior Economist at IHS Markit and the report’s author.

Following today’s Construction PMI, Brendan Sharkey, head of construction and real estate at accountancy firm MHA MacIntyre Hudson, says the industry has emerged from Carillion’s collapse relatively unscathed, but is slow waking up to the Brexit threat:

'Today’s figures reflect a sector that’s doing well and it has proved resilient over recent months. The truth is that construction has actually done much better than most people expected following the collapse of Carillion. The carnage among second and third tier construction companies, thought to be an inevitable consequence of Carillion’s demise, has failed to materialise to any real extent, although unfortunately there have been casualties.

'Below the top tier outsourcing and construction giants there are many well run firms with decent profit margins, reserves to see them through a crisis, and good relationships with the tier one firms. This should give us some degree of confidence for the future. The sector is stronger and has better management than most commentators have given it credit for.

'On a less positive note, construction has been relatively slow to wake up to the dangers posed by Brexit. Given the industry doesn’t depend on exports, the potential pitfalls of a no-deal Brexit have perhaps been easier to overlook. Yet construction does depend on the import of raw materials, and crucially on the free movement of labour. Over the next few months we will see more focus on contingency planning and demand for additional information and support from the government.'

Report by Rob Munro