UK manufacturing output shrinks at fastest pace in seven years

Firms cut back on production as Brexit uncertainty hits demand

The UK manufacturing sector shrank at its fastest pace for almost seven years in July as uncertainty surrounding Brexit and a global economic downturn caused firms to reduce their output, the latest snapshot survey suggests.

The closely watched purchasing managers index (PMI) survey came in at 48 for the month, unchanged from June, with anything below 50 indicating contraction. Manufacturing has now shrank for three consecutive months. The last time managers reported weaker activity was in February 2013.

Production volumes hit a seven-year low, dragged down partly because manufacturers sold off stocks built up to prepare for the Brexit deadline of 31 March, said IHS Markit which compiled the data.

While some firms were still running down stocks bolstered before the original Brexit date, others were re-starting these stockpiling efforts in preparation for the new October deadline, IHS Markit said.

Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said: "A killer combination of economic uncertainty and the weakest production levels for seven years, battered the manufacturing sector into contraction for the third consecutive month in July.

"New orders fell as businesses used up stockpiled materials, EU businesses moved supply chains out of the UK and weakness in the global economy stifled demand from both domestic and export markets."

Unsurprisingly the decline in employment levels followed suit with one of the sharpest cuts to jobs for more than six years as businesses hesitated to keep calm and carry on and build staff levels.

Employment in manufacturing decreased for the fourth month in a row, with the pace of decline accelerating to one of the highest over the past six-and-a-half years.

Demand was weaker from domestic and overseas markets. The decline in new export business mainly reflected lower intakes from the EU and China.

The latest grim indicator for the UK economy came as Boris Johnson stepped up plans for a no-deal Brexit widely expected to cause significant disruption to businesses and consumers.

However, manufacturers maintained a positive outlook in July with more than 46 per cent expecting output to be higher in a years' time than it is now, compared to just 10 per cent predicting output will be lower.

Managers pointed to new product launches, an expected rebound in exports and reduced uncertainty following Brexit as reasons to be optimistic.

Rob Dobson, director at IHS Markit said manufacturers were "suffocating under the choke-hold" of slower global growth and political uncertainty.

"“The weak, highly competitive environment makes a sustained revival highly unlikely in the coming months.

"However, a short-lived bounce leading up to October should not be ruled out, as some manufacturers are already gearing up to re-start Brexit preparations.

"If so, expect a case of déjà-vu during quarter four, as another correction in inventory holdings hits growth in the lead-up to year-end.

The pound sank to a two-and-a-half year low against the dollar on Tuesday.