UK manufacturing output fell to the weakest level for more than three years in July, data from Markit the survey compiler revealed today. The report indicated that decline in production was the steepest since October 2012.
The Markit/CIPS final Purchasing Managers’ Index for the factory sector dropped to 48.2 in July from 52.4 in June, marking its lowest levels since February 2013. The July’s data was also below the earlier estimate of 49.1.
However, the level of new orders in the UK manufacturing sector rose for the second successive month in July, thanks to the recent depreciation of the UK currency and efforts by companies to secure new contracts.
Rob Dobson, senior economist at Markit commented on the data: "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.”
A rise in export orders in response to the weaker pound was not enough to sustain the sector or make up any shortfall from the sluggish domestic market, said David Noble, group chief executive officer at the Chartered Institute of Procurement & Supply.
Impact on the UK Economy Post-Brexit
This report comes as the first full data provided since the UK voted to leave the European Union, leading some commentators to suggest this could be the beginning of an economic set-back.
“Today’s industrial sentiment survey for July will only add to concerns that the UK may be sliding toward a fresh economic downturn,” said Russ Mould, investment director at AJ Bell, the online investment platform. “The drop to below 50 on all three counts is worrying, as it suggests the EU referendum vote has knocked corporate sentiment – even if only time will tell if this turns into lower investment plans, hiring freezes or even headcount cuts.”
Last week, the Purchasing Managers Index for the UK’s services sector, a key driver of the economy, fell from 52.3 in June, to 47.4 in July. Any reading of the PMI index below 50 indicates a likely economy recession, according to Douglas Scott, global equity income co-manager at Kames Capital, the investment management business.
However, Scott does not expect the UK or Europe to enter a sharp downturn as a result of Brexit.
“Other than a moderate reduction in European growth expectations, we do not expect a material impact on the global economy,” Scott said.
Mould agrees, saying: “The trends in all three PMI surveys had however been clearly lower before the ballot on June 23, so even if the cloud cast by the Brexit decision lifts, it is possible the UK economy had already begun to lose momentum, despite the encouragement offered by the second-quarter GDP growth number released last week.”
Weak Data Ups Likelihood of Rate Cut
Ana Thaker, market economist at Phillip Capital UK believed that the poor UK PMI figures reinforced markets’ expectations of an interest rate cut by Bank of England this Thursday.
Scott echoes Thaker’s views, saying “we think policy makers will continue to err on the side of caution, reinforcing our central view of an ongoing low growth environment where interest rates and bond yields remain anchored ‘lower for longer’.”
Solid Manufacturing Data from China
China manufacturing data is also released today, indicating an improving industry. Caixin’s manufacturing Purchasing Managers’ Index reading for July was 50.6, significantly higher than the 48.6 reading for June, and also above expectations of a score of 48.7. The Caixin reading was ahead of the official reading from China's National Bureau of Statistics, which came in at 49.9 for July, slightly behind expectations for 50.0.
“A weak Yuan may have helped Chinese Small and Mid-Enterprises tracked closely by the Caixin as compared to multinationals leading to the divergence in figures,” said Thaker, adding that that the Chinese figures showed a country improving but still in decline in its manufacturing industry.
Following the release mining stocks rallied on the London Stock Exchange, Anglo American (AAL) is the biggest riser in the FTSE 100 today, up 2.23%.
The US manufacturing data in July was also out today. According to data released by Institute for Supply Management, the manufacturing activity index fell to 52.6 in July, down from 53.2 the previous month and lower than the forecast of 53.
