Unexpected slowdown in exports hits manufacturing confidence

A sharp fall in new export orders has pushed manufacturing confidence lower, according to the latest survey from the Chartered Institute for Purchasing and Supply (Cips).

The Cips' purchasing managers index (PMI) puts confidence at a still-healthy 57.2 in July, down marginally from the 57.6 recorded in June and the lowest level in five months. Any reading over 50 indicates future expansion in output and the Cips/Markit survey index is regarded as a reliable leading indicator for movements in the real economy, with a lag of about six to nine months.

Activity levels have staged a marked bounce back from the 35.2 seen in February 2009 – the low point for the series, which began in 1997. The long run average is 53. The comparatively good news suggests that the revival in manufacturing is continuing, boosted by firms rebuilding stock levels, but may slow because of weakness in demand in Britain's largest overseas markets, especially the eurozone.

Concerns focus on the prospects for exports. Policymakers in the Treasury and the Bank of England have put much store by the deprecation of the pound – down about 25 per cent since its 2007 peaks – to generate a trade-led revival, incidentally helping to rebalance the economy away form consumption and imports and towards investment and exports.

The failure of exporters to respond with more alacrity has puzzled and frustrated ministers and Bank officials. Some of that lack of response is demonstrably due to the series of financial crises in the eurozone and consequent programmes of austerity enacted by governments from Dublin to Athens – all destructive to confidence. Some firms may also have been taking the benefit of the lower pound through higher margins on existing foreign- currency pricing, rather than through increased output. While this will have helped protect their profitability and chances of surviving the downturn, it does little to boost domestic employment, also sagging in the Cips survey.

Rob Dobson, a senior economist at Markit, said: "There are some concerns that growth may slow more sharply in coming months, however, especially in relation to exports.

"Overseas sales growth collapsed from a survey record rate of increase in April to near-stagnation in July.

"Some slowing was to be expected, given the weakening in global trade flows that have been evident in recent months, particularly in Asia, as authorities act to cool their economies to ward off inflation. But the extent of the slowdown in export sales is very surprising and suggests that UK manufacturers are losing out in the global recovery, which will disappoint those that are hoping the UK economy can rebalance away from domestic consumption towards exports."

Yet European manufacturers, such as those in Germany, are better connected to the faster growing markets of China and the Far East and are faring better.

Germany continues to lead the European recovery, with its PMI reading close to its all-time high in July, at 61.2. The US ISM (PMI equivalent) manufacturing index for July came in stronger than expected, but still shows a slowdown in growth. The headline index dipped to 55.5, from 56.2 in June.

Official data on UK manufacturing output for June is due on Friday.