Manufacturing slump leads to shrinking UK economy

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Data pointed to a 41-month low for growth, sparked by the fastest downturn in manufacturing output since 2012. Photo: Peter Summers/Getty Images

The UK economy continues to struggle, according to a closely watched private sector survey of business activity.

IHS Markit and the Chartered Institute of Purchasing and Supply (CIPS) on Monday published flash estimates of UK economic growth in December. The data pointed to a 41-month low for growth, sparked by the fastest downturn in manufacturing output since 2012.

The pound dipped against both the euro (GBPEUR=X) and the dollar (GBPUSD=X) after the data was published.

IHS Markit and CIPS’s composite UK purchasing managers index (PMI), which reflects output across the private sector, came in at 48.5.

PMIs are a survey of private-sector views on economic activity and register on a scale of 1 to 100. Anything above 50 signals growth, while anything below signals contraction.

“The economy contracted for the third time in the past four months,” Chris Williamson, chief business economist at IHS Markit, said in a release.

“The latest decline was the second-largest recorded over the past decade, and increases the likelihood that the economy contracted slightly in the fourth quarter as Brexit-related uncertainty intensified in the lead up to the general election.”

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the data pointed to a 0.2% contraction in fourth quarter GDP, but said PMI had a history of being too pessimistic on growth.

“The decline in the composite PMI to a 41-month low in December shows that businesses were on tenterhooks ahead of the election, with uncertainty about its outcome and Brexit dampening activity,” said Tombs.

Service sector in worst state since 2009

The downturn was led by a sharp decline in the manufacturing sector. December’s manufacturing PMI registered at 47.4, well undershooting an estimate ahead of time of 49.3.

Manufacturing output hit its lowest level since 2012. Duncan Brock, group director at the Chartered Institute of Procurement & Supply, said an unwinding of Brexit stockpiles was partly to blame.

Worryingly, the service sector also shrank. Services PMI came in at 49, compared to forecasts of 49.6.

The service sector index is particularly important, as output from services — which covers everything from waiting tables to advising on M&A — makes up roughly 80% of UK GDP.

“Manufacturing production is falling at a rate exceeded only once since the height of the global financial crisis in early 2009, but output of the vast service sector has now also fallen in each of the past two months, representing the first back-to-back declines since 2009,” Williamson said.

PMIs are closely watched in the market and are the “leading indication of economic health,” according to Fawad Razaqzada, a market analyst at Forex.com.

“Purchasing managers tend to react first to changing market conditions,” Razaqzada said in an email.

While the PMIs point to a slowdown, ING’s Francesco Pesole and Petr Krpata said the data doesn’t “reflect the UK election result so won’t really reflect the post-election sentiment.”

The pound and UK stocks have rallied after the Conservative party won a decisive victory in last week’s general election. The victory has paved the way for progress on Brexit and a potential pick up in business investment.

“Any vestiges of hope are now pinned on the election results as the potential for reducing uncertainty may restore confidence in the months ahead,” said Brock.