UK Manufacturing in Recession Suggests PMI Data

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- Manufacturing PMI beats expectations

- But sector still in contraction territory

- Case for Bank of England interest rate cut grows

The UK's manufacturing sector is in recession, after a much-watched economic survey on Friday confirmed another month of contraction for the sector.

The UK Manufacturing PMI read at 49.6 in October report IHS Markit, up for the second successive month but remaining below the neutral 50.0 mark separating expansion from contraction.

Consensus amongst economists was for a reading of 48.1 to be delivered, but it appears that much of the good news can be put down to temporary factors such as stockpiling anticipation of the October 31 Brexit deadline.

IHS Markit report that activity in the manufacturing sector remains attuned to developments in Brexit, with a mild improvement in overseas sales being reported for the first time in seven months as clients based in the EU brought forward planned purchases to before the (now delayed) Brexit departure date.

Domestic demand appears to be a weight on the sector, with firms reporting that weaker inflows of new business, especially from the domestic market, had led to a further scaling back of output.

"The underlying picture looks even darker than even these disappointing headline numbers suggest, as output and new orders fell despite short-term boosts from stock-building activity in advance of the October 31st Brexit deadline, which included a rise in exports as clients in the EU sought to mitigate supply risk," says Rob Dobson, Director at IHS Markit.

Perhaps the most worrying development reported is an increase in job losses from the sector. Job losses were seen for the seventh consecutive month in October, with IHS Markit saying the rate of decline among the steepest over the past decade.

Lower employment reflected weak demand, softer client confidence, the non-replacement of leavers and staff redundancies, report IHS Markit. There were also reports citing Brexit uncertainty, in some cases resulting in hiring freezes.

"While the manufacturing PMI recovered in October from September’s extremely weak level, it is still consistent with a recession in the manufacturing sector," says Ruth Gregory, UK Economist at Capital Economics. "Even after October’s increase, the PMI is still pointing to fairly steep falls in manufacturing output of around 0.7% q/q at the start of Q4. Overall, then, it looks like the manufacturing sector is back in recession."

With the other sectors of the economy also showing little growth, Capital Economics are expecting the economy to expand by no more than 0.2%-0.3% quarter-on-quarter in the next few quarters.

"So if Brexit is delayed again beyond 31st January, and the economy remains weak as we expect, then we still think that the Bank of England will cut rates – perhaps by 25bp in May 2020," says Gregory.

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