UK Manufacturing Sector Contracts in October, Construction Barely Expands

on Nov 2, 2012

On 1 November the Markit/CIPS UK Manufacturing Purchasing Managers Index was released showing that the downturn in UK manufacturing has accelerated at the start of the fourth quarter this year. Today (2 November) Markit also posted its UK Construction PMI, which shows the weakness in the sector has continued in the last month.

**Manufacturing PMI**
The UK manufacturing sector saw operating conditions deteriorate for the sixth consecutive month in October as companies continued to face a combination of weak export sales, declining domestic demand and rising cost pressures.
The October PMI stands at 47.5, down from a revised figure of 48.1 in September and still below the 50 mark which separates growth from contraction. The rate of decline in production volumes was the second sharpest during the past three-and-a-half years. Further reduction in new work received was the main factor underlying the lower output. New orders fell for the seventh straight month and at a faster pace than in September.

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Manufacturers remained largely cost-cautious, which led to lower levels of purchasing and further depletion of inventories. The rate of reduction in input buying volumes accelerated, while margins were squeezed, as cost inflation hit a seven-month peak coinciding with muted pricing power.
“There is little in last month’s figures to encourage the industry. Where once it looked like high growth areas in Asia might offer opportunities to offset the acutely fragile situation in the Eurozone, it now looks like the global economic slowdown is stifling demand in Asia which is threatening to depress the manufacturing industry in the UK still further.” said David Noble, chief executive officer at the Chartered Institute of Purchasing & Supply.

Phillip Inman, economics correspondent for The Guardian, believes the news that manufacturers continue to scale back on production will sound alarm bells in the Treasury and the Department for Business, Innovation and Skills, which have argued that more favourable conditions for industrial production need to be adopted.
**Construction PMI**
Adjusted for seasonal factors, Construction PMI was registered at 50.9 in October, an improvement from September’s 49.5 but only slightly above the 50.0 value. The higher levels construction output were confined to civil engineering as the sub-sector achieved its second month of modest growth. Residential building was the weakest as output declined for the fifth straight month. Commercial activity also dropped last month but at only a marginal pace.

!m[civil engineering one of the few bright spots in the recent PMI data](/uploads/story/709/thumbs/pic1_inline.png)Squeezed budgets and worries about the economic outlook have led to the longest period of falling new order volumes since that seen during 2008/2009. The lack of new work to replace completed projects has resulted in a return to job shedding last month.

Business outlooks in the construction sector remained grim as the index measuring expectations was estimated at 56.2 in October – much closer to the record-low 45.9 seen four years ago than to the long-run average of 70.4. Sentiment was subdued by the shortages of new business, lending constraints and lower budgets among clients.
“Despite marginal growth in October, the prospects for the construction sector are bleak as firms prepare for the worst. They are heading into a long, dark winter, by shedding jobs and laying off subcontractors in response to the longest decline in new business since the start of the financial crisis in 2008/2009.” Mr Noble commented on the Construction PMI report.
**Triple-Dip Recession?**
In the third quarter Britain was finally able to exit the recession and expand by 1 percent but many economists warned the growth was supported mainly by one-time events such as the Olympics and the recovery from the jubilee holiday in the second quarter. Bank of England policymakers have cautioned the strong growth is unlikely to be repeated in the fourth quarter. According to James Mitchell, an economist at Warwick Business School, a triple-dip recession is on the cards and if it happens the country will enter a long period of very low growth.
“The recession does raise questions about what economic growth will look like in the future. Historically, GDP has grown about 2.5% each year on average. There is a danger that the current recession has left a permanent scar on the economy, which is being picked up in the lower productivity data. If so, when the UK economy does emerge from recession, people may well have to get used to less rapid increases in their standards of living than their parents experienced.” said Prof. Mitchel as quoted by The Guardian.


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