Manufacturing decline continues to quicken pace

CIPS' purchasing managers' index for UK manufacturing, a composite measure of activity which includes output, new orders, employment, suppliers' delivery times and stocks of goods purchased, improved from 47.7 in November to 49.6 in December but crucially remained below the level of 50 which separates expansion from contraction for a third consecutive month.

The average of the manufacturing PMIs for October, November and December was the weakest since the second quarter of 2009 – thus signalling the fastest pace of decline in two-and-a-half years.

There were some bright spots in CIPS' latest survey, with the December PMI reading not as bad as had been feared by the City.

New export orders rose for the first time in five months in December. However, total new orders continued to fall and this highlighted the weakness of domestic demand amid lowly business and consumer confidence.

And, although the output component of the PMI was virtually stagnant in December after significant falls, economists noted this had been achieved partly by running down backlogs of work.

Howard Archer, chief UK economist at consultancy IHS Global Insight, said: "The purchasing managers' survey still indicated that manufacturing output contracted appreciably in the fourth quarter of 2011, which maintains fears that GDP (gross domestic product) declined."

Brian Ashcroft, emeritus professor of economics at the University of Strathclyde and economics editor of the Fraser of Allander Institute's closely-watched commentary, believed the performance of the Scottish manufacturing sector in the fourth quarter would have been in line with that indicated by CIPS' UK-wide survey.

Commenting on the implications of the finding that UK manufacturing activity fell at its fastest pace since mid-2009 in the final quarter of 2011 for the economy north of the Border, Professor Ashcroft said: "It is a reasonable expectation the pattern would be similar here. It is similar right across Europe."

He added: "A lot of this is driven by what is happening in Europe, and the lack of confidence in business and among consumers. I suspect Scotland will probably be quite similar. Aspects of manufacturing will have held up better here, but I think it would be too hopeful to think we have bucked this trend...I think it is very unlikely that Scotland would be much different from that position in the United Kingdom."

Professor Ashcroft highlighted uncertainty over the economy. Referring to the manufacturing contraction, he said: "Does this presage a recession? That we don't know at this stage."

Colin Borland, head of external affairs for the Federation of Small Businesses in Scotland, was not at all surprised by the sharp contraction in UK manufacturing output in the fourth quarter signalled by CIPS' survey.

Highlighting the impact of weak consumer confidence on manufacturers, he said: "It is not easy for anyone at the moment, if no-one is buying. We are seeing problems with consumer confidence aren't just having an effect on people who sell directly to consumers...That is all linking back to unemployment and fear of unemployment...which is putting a brake on everything at the moment."

Mr Borland added: "I am afraid all sorts of disappointing and worrying news are not going to be a surprise at the moment."

Samuel Tombs, UK economist at consultancy Capital Economics, said: "December's CIPS survey suggests that conditions in the manufacturing sector stabilised at the end of the year. We fear, though, that this will just be the calm before the storm. Indeed, we continue to expect the overall economy to re-enter recession this year, with GDP falling by around 0.5% in 2012 as a whole."

Rob Dobson, senior economist at CIPS' survey compiler Markit, said: "Over the fourth quarter as a whole, producers reported their worst performance since the second quarter of 2009. Manufacturing will therefore likely be a drag on the economy in the closing months of the year."