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UK manufacturing decline adds pressure on Bank to cut interest rates UK manufacturing decline adds pressure on Bank to cut interest rates
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Britain’s manufacturing sector shrank at the steepest pace for more than three years in the wake of the vote to leave the EU, forcing factories to cut jobs as they grappled with higher costs and lower demand. Britain’s manufacturing sector shrank at the fastest pace for more than three years in the wake of the vote to leave the EU, forcing factories to cut jobs as they grappled with higher costs and lower demand.
News that the decline in manufacturing activity in July was steeper than first thought cemented a view that the Bank of England will cut interest rates this week in a bid to shore up business and consumer spending.News that the decline in manufacturing activity in July was steeper than first thought cemented a view that the Bank of England will cut interest rates this week in a bid to shore up business and consumer spending.
The closely watched Markit/CIPS UK Manufacturing PMI survey, which polls more than 600 companies monthly, suggested domestic demand for manufacturers’ goods had been hit by uncertainty both before and after the UK’s referendum on EU membership on 23 June. That overshadowed a boost to export orders from a weaker pound, which makes UK goods cheaper.The closely watched Markit/CIPS UK Manufacturing PMI survey, which polls more than 600 companies monthly, suggested domestic demand for manufacturers’ goods had been hit by uncertainty both before and after the UK’s referendum on EU membership on 23 June. That overshadowed a boost to export orders from a weaker pound, which makes UK goods cheaper.
The headline index was the worst since early 2013 and weaker than a “flash” estimate published in July.The headline index was the worst since early 2013 and weaker than a “flash” estimate published in July.
The new reading, which takes in responses from a greater number of firms, stood at 48.2, down from the flash estimate of 49.1 and lower than 52.4 in June. A reading above 50 denotes expansion while a reading below suggests activity contracted. Responses were collected between 12 and 26 July. The new reading, which takes in responses from a greater number of firms, stood at 48.2, down from the flash estimate of 49.1 and lower than 52.4 in June. A reading above 50 denotes expansion while a reading below suggests that activity contracted. Responses were collected between 12 and 26 July.
The drops in output, new orders and employment were all steeper than the earlier flash estimates and will add pressure on the Bank to lower borrowing costs from their current 0.5% when policymakers announce their latest decisions on Thursday.The drops in output, new orders and employment were all steeper than the earlier flash estimates and will add pressure on the Bank to lower borrowing costs from their current 0.5% when policymakers announce their latest decisions on Thursday.
Most City economists polled by news services Reuters expect an interest rate cut to 0.25%. A small minority expect no change for now and some expect a bigger cut that will take base rates to zero. Most City economists polled by news service Reuters expect an interest rate cut to 0.25%. A small minority expect no change for now and some expect a bigger cut that will take the base rate to zero.
As fears grow the economy will slow sharply over coming months, there are expectations the Bank will complement a rate cut with other measures such as more money printing, known as quantitative easing, or an expanded scheme to give firms and households better access to credit. As fears grow that the economy will slow sharply over coming months, there are expectations the Bank will complement a rate cut with other measures such as more money printing, known as quantitative easing, or an expanded scheme to give firms and households better access to credit.
Rob Dobson, senior economist at the PMI survey compiler Markit said the manufacturing slowdown last month came amid increasingly widespread reports the referendum had hit business activity. Rob Dobson, senior economist at the PMI survey compiler Markit, said the manufacturing slowdown last month came amid increasingly widespread reports that the referendum had hit business activity.
“The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors, although exporters did report a boost from the weaker pound. However, the improvement in exports was less marked than previously estimated, blamed in part on sluggish overseas demand,” he said.“The downturn was felt across industry, with output scaled back across firms of all sizes and across the consumer, intermediate and investment goods sectors, although exporters did report a boost from the weaker pound. However, the improvement in exports was less marked than previously estimated, blamed in part on sluggish overseas demand,” he said.
He noted that the pound, which fell sharply against the euro and US dollar after the vote to leave the EU, had helped exports but made imports to the UK more expensive.He noted that the pound, which fell sharply against the euro and US dollar after the vote to leave the EU, had helped exports but made imports to the UK more expensive.
“The downside of the currency was an upsurge in input price inflation to a five-year high on the back of rising import costs,” said Dobson.“The downside of the currency was an upsurge in input price inflation to a five-year high on the back of rising import costs,” said Dobson.
The survey signalled that manufacturing employment had fallen for the seventh straight month in July. “Companies linked lower staffing levels to the contractions in output and new orders. There was also mention of natural wastage, restructuring, redundancies and outsourcing leading to job cuts,” the PMI report said.The survey signalled that manufacturing employment had fallen for the seventh straight month in July. “Companies linked lower staffing levels to the contractions in output and new orders. There was also mention of natural wastage, restructuring, redundancies and outsourcing leading to job cuts,” the PMI report said.
The manufacturing survey will be followed by similar polls of the construction sector on Tuesday and of the much bigger services sector on Wednesday.The manufacturing survey will be followed by similar polls of the construction sector on Tuesday and of the much bigger services sector on Wednesday.
The flash post-referendum PMI report in July already suggested activity fell at the sharpest pace on record in the services sector, which makes up the lion’s share of the UK economy and covers a wide range of businesses from hotels to insurance.The flash post-referendum PMI report in July already suggested activity fell at the sharpest pace on record in the services sector, which makes up the lion’s share of the UK economy and covers a wide range of businesses from hotels to insurance.
Elizabeth Martins, an economist at HSBC, noted the latest data added to news of a sharp drop in consumer confidence last week and reinforced expectations of a rate cut on Thursday.Elizabeth Martins, an economist at HSBC, noted the latest data added to news of a sharp drop in consumer confidence last week and reinforced expectations of a rate cut on Thursday.
“We had already thought that the flash PMIs, collectively, would seal the deal for MPC action this week. This downward revision - and that of the GfK consumer confidence index for July - is unlikely to change any minds. But it does paint an even bleaker picture of the UK economy,” she said. “We had already thought that the flash PMIs, collectively, would seal the deal for MPC action this week. This downward revision – and that of the GfK consumer confidence index for July – is unlikely to change any minds. But it does paint an even bleaker picture of the UK economy,” she said.