The UK manufacturing sector last month saw accelerated declines in output and new orders which were among the steepest registered outside of events such as the global financial crisis and Covid-19 pandemic, and employment continued to fall, a key survey shows.

The manufacturing purchasing managers’ index in the survey compiled by the Chartered Institute of Procurement & Supply and S&P Global plummeted from 45.3 in July to 43 in August on a seasonally adjusted basis, dropping further below the level of 50 deemed to separate expansion from contraction to signal the sharpest deterioration in conditions in the sector in 39 months.

Production volumes in the UK manufacturing sector have now fallen for six consecutive months.

CIPS and S&P Global flagged the impact on demand in the sector from rising interest rates, the cost of living crisis, export losses and “concerns about the market outlook”.

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In spite of the falls in output, new orders and employment, CIPS and S&P Global noted that manufacturers had “maintained a positive outlook despite the current economic malaise”. Optimism among manufacturers hit a four-month high, with 56% of firms expecting growth over the coming year. This was linked to hopes for a market revival, new product launches and acquisition and diversification plans.

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CIPS and S&P Global said: “The downturn in manufacturing output took a further turn for the worse during August, as production volumes decreased for the sixth straight month. The rate of contraction accelerated to its steepest in a year and to one of the fastest in the survey history. Companies mentioned slower market conditions, declining new order intakes and efforts to reduce inventories of finished goods as factors underlying the latest contraction.”

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They added: “August saw an accelerated decrease in new order intakes, as deteriorating market conditions both at home and in overseas markets hit demand. There were reports that a generally weaker global economic backdrop had led to declining order intakes from key markets such as the US, Europe, China and South America. Furthermore, the rates of decline registered for both total new orders and new export business were among the steepest seen outside of the GFC (global financial crisis) and Covid-19 pandemic.”

Manufacturing staffing levels were cut for the 11th consecutive month in August, the survey shows.

Companies linked lower employment to reduced intakes of new work, falling output volumes and cost-control efforts, CIPS and S&P Global noted. Excess capacity at factories was also cited by some firms, as backlogs of work contracted to the greatest extent since April 2020.

Rob Dobson, director at S&P Global Market Intelligence, said: “August saw a further deepening of the UK manufacturing downturn. The PMI sank to a 39-month low as output and new orders contracted at rates rarely seen outside of major periods of economic stress such as the global financial crisis of 2008/09 and the pandemic lockdowns.

"Manufacturers reported a weakening economic backdrop as demand is hit by rising interest rates, the cost of living crisis, export losses and concerns about the market outlook.

“While this is being felt across the manufacturing industry, business-to-business companies are especially hard hit. Intermediate goods producers saw the steepest drops in output, new orders and employment as a result.”

He added: “The downturn is also forcing companies into a more defensive posture.”

John Glen, chief economist at CIPS, said: “Another substantial fall in manufacturing activity, contracting for the sixth month in a row and [at] the fastest rate since May 2020, showed that these are tough times for manufacturers.

"The constant pressures on business costs from inflation and the systemic weaknesses in the UK and global economies were also driving the fastest fall in new orders since the financial crisis, outside the pandemic years. As a result, manufacturers were forced to reduce the size of their business operations, their headcounts and reassess what business is likely to look like in the remainder of the year and in a highly competitive economic environment.”