December 2019 Manufacturing Output Of UK Lowest Since July 2012: IHS Manufacturing Managers’ Index

The manufacturing output in United Kingdom has hit a seven year low at the end of December 2019. This is as per data based on the Manufacturing Purchasing Managers index (PMI) for United Kingdom managed and maintained by the IHS Markit company. The index which gives out ratings based on surveys of manufacturing managers of a country, considers the manufacturing output as improving if the rating is above 50 and the manufacturing output as deteriorating if the ratings are below 50. The rating, however,  was already in the below 50 zone with the November 2019 rating registered at 49.1, however the rating for December 2019 at 45.6 is the lowest since July 2012.

The manufacturing Purchasing Managers’ Index™ (PMI™) is designed to provide early insights into the changing economic and business scenarios the effect the various manufacturing sectors of a constituent country. The survey, gives the highest weightage of 30 per cent to new orders received by the manufacturers which generally is the indicator to move first among the set of early indicators; this is followed by output which is given a 25 per cent weightage; followed by employment having 20 per cent weightage which is  followed by delivery times having a 15 per cent weightage and finally inventories of goods purchased having a weightage of 10 percent. The index covers as many as twenty three different manufacturing sectors of an economy.

The IHS Market company which conducted this survey, while commenting on the numbers stated that the slump on account of a weak demand for goods is further exacerbated by subdued confidence among manufacturers regarding the uncertain environment post Brexit. This has resulted in the input purchases by manufacturers being cut back sharply and jobs being cut for the past nine months successively. The official economic data of the British economy, however, had also been portraying a similar picture. Numerous reports and surveys conducted by Bank of England Office of National Statistics and other such agencies have suggested among other things that the British economy has slowed to an annual rate of 1.1 per cent during the third quarter of 2019, with this rate having not been breached since 2010. The industrial output for the quarter has also dropped by 1.3 per cent year-on-year.

Brexit, over the past few years, has had a defining impact on the British economy and its manufacturing sector. The choppy macro-economic environment resulted in the confidence among the average British consumers falling to an all-time low. The manufacturers also, being affected by this depressed environment, curtailed their manufacturing activities and went into a capital preservation mode. Capital expenditures across the board and across all industries were postponed or cancelled and retailors and other businesses stockpiled in anticipation of the surge in prices in the post Brexit era. The British manufacturing sector suffers from additional supply chain bottlenecks, of sourcing its raw materials and intermediate goods from other European countries. Post Brexit most of these goods would stop flowing into United Kingdom and domestic manufacturers would not be able to meet this sudden rise in demand at least in the short run, a fact which has contributed the most to several manufacturers to temporarily stop or curtail their production activities.

The survey of this month, however, has been called into question on several grounds. First, the survey was conducted between 5 December and 18 December 2019, with the General elections being conducted in between this period on the 12th of the last month, when the purchasing managers could have been influenced by the uncertainty regarding the election results and their divergent views regarding which way the British electorate might vote and its likely impact on the economic scenario in United Kingdom. With the Boris Johnson government registering a decisive win, the scenario has dramatically changed.

Towards the beginning of the new year however, a lot of economic indicators have started to turn northwards signifying that the economy may be turning for the better. Consumer confidence, consumer credit offtake and retail sales and some of the leading indicators have already started to move upwards which are important signs that the mood among the British consumers is now improving. The next important milestone however is the Brexit agreement that will be adopted by the British parliament providing more strength to the sentiments in the country followed by the actual Brexit taking place on 31 January 2020. The IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) is an important index of important macro-economic parameters that has on several instances before been inaccurate. In the past the index has several times overstated economic slowdown as its survey does not include data from the public sector, which is an important economic constituent of several countries including that of the United Kingdom. In countries which have a strong public sector, governments often channelize their spending through this sector to spur economic growth and employment.