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Financial News: UK Manufacturing Contracts For First Time Since Mid-2016

UK Manufacturing Contracts For First Time Since Mid-2016

06/03/2019 - 08:45:00 (RTTNews)

(RTTNews) - The UK manufacturing sector shrunk unexpectedly in May, marking its first contraction since the Brexit referendum in July 2016, survey results from IHS Markit showed Monday.

The headline IHS Markit/Chartered Institute of Procurement & Supply Purchasing Managers' Index declined more-than-expected to 49.4 in May from 53.1 in April. The score was forecast to fall moderately to 52.0.

As uncertainty drags on, overseas customers are switching their supply chains away from the UK, according to a survey published by the Make UK manufacturers' organisation and business advisory firm BDO LLP.

The survey suggested that prospects for the sector are continuing to weaken in the second quarter as the uncertainty of Brexit drags on. Investment was paralyzed with no evidence that there is pent-up demand.

The survey forecast manufacturing to grow just 0.2 percent this year and 0.8 percent in 2020.

A slowdown in the global economy, and trade wars hotting up could tip the scales even further next month and increase the likelihood that the UK manufacturing sector will remain in contraction territory, Duncan Brock, group director at the CIPS, said.

The upshot is that as most of impact of the no deal Brexit preparations in March appear to have now unwound, May's large fall is unlikely to be repeated in June, Thomas Pugh, an economist at Capital Economics, said.

However, given the weakness overseas, a sharp rebound also seems unlikely, Pugh noted. As a result, the manufacturing sector is likely to be a drag on GDP growth for some time.

The factory sector saw high level of inventories as manufacturers resorted to stockpiling in advance of the original Brexit date, the PMI survey showed. Also, Brexit uncertainty has led clients to divert supply chains away from the UK, leading to lower demand from within the EU.

The total volume of new business placed fell for the first time in seven months as export orders registered its biggest decrease in over four-and-a-half years, reflecting Brexit uncertainty.

The renewed downturn in new orders weighed on both output and employment. The trend in production was the weakest over the last 34 months, as an increase at large companies was offset by contractions at small and medium-sized firms.

Employment decreased for the second straight month due to workforce restructuring, difficulties recruiting appropriate staff, natural attrition and improved efficiency.

The trends in inventory holdings and purchasing activity all impacted by the delay to Brexit, the survey showed.

Output charges inflation rose to a three-month high in May, largely due to a marked acceleration for consumer goods. On the other hand, purchase price inflation edged lower.

Further, the survey showed that almost 49 percent expect output to be higher in 12 months' time, compared to 7 percent forecasting contraction.

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