Britain ‘on the brink’ as manufacturing shrinks at fastest rate in three years

Manufacturers are battening down the hatches and cutting activity amid expectations of weaker market conditions with a union boss warning the UK is on the brink of recession, an industry expert has said.

Britain’s manufacturing sector shrank at its fastest rate for three years last month after a year-long decline, according to an influential survey.

The S&P Global/CIPS UK Manufacturing PMI survey returned a reading of 45.3 in July compared to 46.5 in June.

It marks the joint-worst performance for the sector since May 2020, indicating it is shrinking pretty rapidly. The result is slightly better than the 45.0 score which analysts expected.

The survey found companies were hit by weakening exports with the fall in exports among the fastest in three years. Manufacturers blamed a weakening global market hitting demand from most parts of the world.

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Sophie Lund-Yates, Lead Equity Analyst at Hargreaves Lansdown, told “The manufacturing downturn is deepening according to July’s S&P Global/CIPS Manufacturing PMI survey and gave the worst rating since the first lockdown in May 2020.

“Output, new orders and employment all took a turn for the worse as manufacturers cut activity to batten down the hatches for weaker market conditions.

“Exports continue to have a torrid run, now into the eighteenth consecutive month of falling numbers, showing its not just the UK which is under pressure, global markets are weaker too.

“Prices remained stubbornly high as manufacturers look to continue to recoup their own increased costs and with inflation still at dizzying heights anything other than an interest rate rise tomorrow would be a complete surprise, bringing more misery to mortgage holders.”

Ms Lund-Yates said the “weaker picture” suggests a dampening of demand, adding this represents “a piece of the jigsaw puzzle” which should eventually lead to more normal levels of inflation and an end to relentless upward interest rate changes.

The Bank of England will announce its next interest rate move on Thursday (August 3) with a majority of analysts expecting a 25 basis points rise from 5 percent to 5.25 per cent.

Rob Dobson, Director at S&P Global Market Intelligence, said output fell at the quickest pace since January as overstocked clients, rising export losses, higher interest rates and the cost-of-living crisis coalesced to create a worrying intensification of the slump in demand.

He added: “Although manufacturers maintain a generally positive outlook for the sector, with over half still expecting output to rise over the coming year, other forward-looking indicators show the mire that industry is currently facing.

“Domestic and export demand are weakening, and backlogs of work are declining sharply, all of which likely presages further cutbacks to production, employment and purchasing in the months ahead.

“The only upside is that prices are falling in this environment of sharply deteriorating demand, with cost pressures also helped lower by further repair to supply chains. Supplier performance improved for the sixth successive month, while raw material prices fell for the third month in a row.”

Mr Dobson concluded while the results were “good news” for inflation, lower prices are largely a symptom of malaise and so “bode ill” for manufacturers’ profits, which could hit investment.

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The TUC urged Threadneedle Street on Wednesday to call a halt to interest rate hikes after warning widespread job losses have left Britain’s economy on the brink.

TUC general secretary, Paul Nowak, told The Guardian: “With the country teetering on the brink of recession, the last thing we need is another hike in interest rates.

“This will just heap further misery on households and businesses and put many thousands more jobs and livelihoods at risk. Setting us on course for another economic shock is reckless – not responsible.”

The umbrella group for unions said a total of 120,000 jobs had disappeared across 11 industries, with skyrocketing interest rates a key factor.

Meanwhile, housebuilder Taylor Wimpey on Wednesday cautioned that higher mortgage rates have increased concerns over whether potential customers can afford to buy.

Despite the gloom, the company told shareholders it is building properties “slightly ahead” of forecasts.

Taylor Wimpey said it saw an encouraging start to 2023 despite borrowing costs, but market conditions weakened in the second quarter.

It said it was particularly impacted by a sharper increase in mortgage costs in June after the Bank of England hiked the base interest rate from 4.5 per cent to 5 per cent.

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