UK manufacturing industry risks sliding into recession thanks to Brexit, warns IHS Markit study

The IHS Markit/CIPS Purchasing Managers Index has indicated a potential slide into recession, as concerns over Brexit intensify.

The manufacturing sector made a lacklustre start to 2019, as trends in output and new orders slowed and employment fell for only the second time in the past two and a half years.

Companies reported that Brexit preparations led to sharp rises in both purchasing activity and stockpiling of inputs at warehouses.

The IHS Markit/CIPS Purchasing Managers’ Index fell to a three-month low of 52.8, down from 54.2 in December and its second weakest reading since July 2016, which was the first survey month following the EU referendum result.

The trend in production values was the weakest registered during the past two and a half years, and although output rose solidly at consumer goods producers, this was largely offset by weaker expansion in the intermediate goods sector and the first decline in investment goods output since July 2016.

With January also seeing a marked slowdown in the rate of expansion in new order inflows, companies reporting an increase in output mainly linked this to stock-building activity.

Inventories of finished goods rose at the third-fastest rate in the survey history, bested only by those seen in May and December of 2018.

Brexit preparations were also a major contributing factor underlying the trends in input buying activities and stocks of purchases.

Inventory holdings increased at the fastest pace in the 27-year survey history, as purchasing volume expanded to the greatest extent since November 2017.

The outlook for the UK manufacturing sector remained positive in January, with almost 46 per cent of companies reporting they expect output to be higher one year from now.

However, Brexit uncertainty, the exchange rate and signs of a European economic slowdown all weighed on sentiment, as the overall degree of positive sentiment dipped to a 30-month low.

Rob Dobson, Director at IHS Markit, said: “The start of 2019 saw UK manufacturers continue their preparations for Brexit. Stocks of inputs increased at the sharpest pace in the 27-year history, as buying activity was stepped up to mitigate against potential supply-chain disruption in coming months. There were also signs that inventories of finished goods were being bolstered to ensure warehouses are well stocked to meet ongoing contractual obligations.”

“January also saw manufacturing jobs being cut for only the second time since mid-2016 as confidence about the outlook slipped to a 30-month low, often reflecting ongoing concerns about Brexit and signs of a European economic slowdown. With neither of these headwinds likely to abate in the near-term, there is a clear risk of manufacturing sliding into recession.”

Duncan Brock, Group Director at the Chartered Institute of Procurement and Supply, said: “Brexit blight strikes again with the weakest performance in manufacturing supply since July 2016 and optimism withers away under the weight of uncertainty as the UK teeters on the edge of departure from the EU.”

Francesco Arcangeli, Economist at EEF, said: “EU manufacturing PMI is also trending downwards and getting ever closer to the 50 contraction threshold. Germany moved to negative territory for the first time in more than four years and Italy remained below-50 for the fourth month in a row.”

“Italy has now officially entered technical recession while Germany is teetering above it by an inch. This is bad news for UK exporters, with the risk of a cliff-edge Brexit increasing and global trade headwinds brewing, manufacturers will be concerned at the possibility of a perfect storm.”

Stephen Cooper, Head of Industrial Manufacturing at KPMG in the UK, said: “This week has brought a wave of snow and ice to the UK and the PMI results for January reflect that chilly blast.”

“The underlying data does not paint a rosy picture, and when taken with poor results from Europe, macroeconomic issues and a downturn in activity in China, these factors suggest that a slip into recession for UK manufacturing is a distinct possibility. With this and the continuing Brexit saga, we continue to encourage manufacturers to take positive steps to understand their supply chains, mitigate risks and ensure, to the best of their ability, that financing is available in case conditions deteriorate further.”