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Concerns rise over balance of economic recovery

UK manufacturing growth slowed sharply and unexpectedly in August, and the sector has shown signs of particular weakness in Scotland in the last three months, separate surveys have shown.

SLOWDOWN: UK manufacturers reported weaker growth in output, new orders and employment as the sector lost momentum in August.
SLOWDOWN: UK manufacturers reported weaker growth in output, new orders and employment as the sector lost momentum in August.

The slowdown in UK manufacturing growth, revealed yesterday in a survey published by the Chartered Institute of Purchasing and Supply (CIPS), fuelled concerns about the unbalanced nature of the overall economic recovery. It was viewed as reducing further the chances of the Bank of England raising UK base rates from their record low of 0.5 per cent before the year-end.

CIPS published its survey as a separate report, from manufacturers' organisation EEF and accountancy firm BDO, showed Scotland had seen weaker trends in orders and employment than any other part of Great Britain in the last three months.

Subtracting the percentage of firms reporting a rise in orders from those suffering a fall, the EEF survey showed a balance of five per cent had experienced a drop in demand over the last three months. A balance of eight per cent of Scottish manufacturers reported a rise in employment, but, as with orders, this was the weakest reading for any part of Great Britain.

A balance of five per cent of Scottish manufacturers reported a rise in output in the last three months. However, manufacturers in Scotland forecast a weaker rise in output than their counterparts in the rest of Great Britain in the coming three months. CIPS's headline purchasing managers' index (PMI) for the UK manufacturing sector, which measures changes in output, new orders, employment, suppliers' delivery times and stocks of goods purchased, fell from 54.8 in July to 52.5 in August on a seasonally-adjusted basis. Although it remained above the level of 50 which separates expansion from contraction in CIPS's survey, the August reading signalled a significant slowdown in the pace of growth of manufacturing activity to its weakest since June 2013 and was well adrift of the level of 55 forecast by economists.

The survey showed a sharp slowdown in growth of output and new orders. The pace of increase of new export orders also eased. And the report signalled a significant weakening of growth in the UK manufacturing workforce.

Paul Hollingsworth, UK economist at consultancy Capital Economics, said: "Signs that the manufacturing recovery may have lost a little steam [are] particularly worrying, given that the economic recovery is already quite unbalanced. Indeed, it looks as if the onus will remain on the services sector to maintain the recovery's pace."

However, remaining upbeat about the outlook for the sector, he added: "Despite signs of a near-term slowdown, we expect that the manufacturing sector's recovery should be bolstered by strong confidence, rising incomes and greater investment by firms. Accordingly, we still forecast manufacturing output to rise by three per cent in both 2014 and 2015."

Rob Dobson, senior economist at CIPS survey compiler Markit, said: "Growth of the UK manufacturing sector cooled further in August, taking the headline PMI down to a 14-month low of 52.5. The underlying dynamics of the survey also provided a consistent picture of a broad slowdown, with inflows of new business and new export orders weakening and the pace of job creation also easing."

He gave his view that sustaining the upturn was "nonetheless still a positive in itself", and said it should be noted that the pace of expansion remained solid and a touch above its long-run average.

However, he added: "It is also becoming increasingly evident that UK industry is not immune to the impacts of rising geopolitical and global market uncertainty, especially when they affect economic growth and business confidence in our largest trading partner, the eurozone. It is noticeable that, where export orders were reported to have risen, companies mainly linked this to demand from North America, Asia and the Middle East, as opposed to our European partners.

"It therefore looks as if manufacturing will provide a lesser contribution to the UK economic growth story in the third quarter than at the start of the year."

David Noble, chief executive officer at CIPS, said: "To help plug the hole left by a faltering eurozone, manufacturers are finding new markets in North America and the Middle East."

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