UK factories face tough 2023 after December weakness

LONDON: Following one of the sharpest falls in activity since the 2008-09 recession last month, British manufacturers are starting 2023 on the back foot as they reflected a sharp fall in new orders and ongoing job cuts.

The S&P Global/CIPS UK manufacturing Purchasing Managers’ Index (PMI) sank to 45.3 in December from 46.5 in November, its lowest since May 2009 apart from two months at the start of the COVID-19 pandemic in 2020.

Tuesday’s reading was stronger than an initial estimate of 44.7 released last month, but well below the 47.8 reported in the equivalent euro zone survey on Monday.

In a statement, S&P director Rob Dobson said: “Output contracted at one of the quickest rates during the past 14 years, as new order inflows weakened.”

“The decline in new business was worryingly steep, as weak domestic demand was accompanied by a further marked drop in new orders from overseas,” the director added.

The figures broadly chime with a gloomy outlook issued last month by trade association Make UK, who forecast output in the sector would fall 3.2% in 2023. The latest official data shows factory output in October was 4.6% lower than a year before.

“These results are the latest in a series of weak indicators … which suggest that GDP likely fell again in Q4 2022. Furthermore, with the squeeze on household and corporate finances set to continue, the situation is unlikely to improve in the near future,” said Martin Beck, chief economic advisor to the EY ITEM Club.

Government budget forecasters predicted in November that the British economy as a whole would shrink 1.4% this year as businesses and households continue to face high inflation.

Separately, according to a quarterly study by Deloitte, chief financial officers at major British companies believe that increased interest rates make this the worst time for businesses to borrow since the financial crisis of 14 years ago.

In the monthly PMI survey, manufacturers expressed somewhat higher optimism about the coming year. Future output expectations reached their highest point in five months as supply chain issues subsided and inflation pressures reached their lowest point since late 2020.

However, when orders decreased from both local customers and clients in China, United States, Europe, and Ireland, manufacturers continued to cut employments at the fastest rate since October 2020.

“The main driver of lost export contracts was weak global economic conditions, while there was also mention of Brexit-related issues, such as shipping delays and higher costs, leading some EU clients to source products elsewhere,” survey compiler S&P Global said.