Britain’s factories continue to cut production as weaker pound fails to lift exports

Britain’s factories continued to cut back production in September as demand from the domestic and overseas markets declined and a weaker pound pushed up the cost of imported materials. 

Manufacturing output fell for the third month in a row, with the closely watched S&P Global/CIPS UK Manufacturing PMI scoring 48.4 – only a fraction higher than August’s 27-month low of 47.3.

A reading below 50 indicates that the sector, which makes up around 10 per cent of the UK economy, is contracting, and will have contributed to falling growth in the third quarter. 

Falling demand: Manufacturers saw new orders decline for the fourth successive month

New orders declined for the fourth successive month, with some manufacturers saying they had received cancellations due to long wait times, rising uncertainty, high inflation and the cost of living crisis hitting demand. 

Exports were hit particularly hard, with new orders from abroad falling at the fastest pace since the depths of the pandemic in May 2020 amid lower demand from the US, EU and China.  

This happened despite the more competitive exchange rate, which made it cheaper for clients outside the UK to buy. The pound dropped by 3 per cent against the dollar over the past month and has lost 17 per cent since the start of the year.

Sterling went from $1.16 at the end of August to a record low of $1.03 last week after the Government’s disastrous mini-Budget, before rebounding to $1.13 today as the Chancellor tried to calm markets by making a U-turn on tax cuts for the wealthy. 

A weaker pound has made the cost of doing business higher for manufacturers as they pay more to import materials, which have also increased in cost due to shortages and rising energy and transport costs.

Manufacturers reported that a wide range of materials – from chemicals and  electronics to foodstuffs, metals, packaging, plastics and timber –  had gone up in price in September, reversing a slight improvement seen in recent months.

This prompted them to pass their higher costs on to clients, with output charges rising at a faster pace than the previous month, according to the report.

Rob Dobson, director at at S&P Global Market Intelligence, said: ‘Disappointingly, exports continue to fall despite the more competitive exchange rate. 

‘There was also less positive news on the price front, with rates of inflation in input costs and selling prices both picking up in September, linked in part to import costs rising due to the weaker pound.’

Shortages, as well as disruption at ports and Brexit-related paperwork issues, caused delays and resulted in delivery times lengthening for the first time in five months, reversing a recent improvement.

Pound vs dollar: The recent slump in the pound has made the cost of doing business higher for manufacturers as they pay more to import materials

Dr John Glen, chief economist at the Chartered Institute of Procurement & Supply, said: ‘Manufacturing businesses continued to feel an autumnal chill in September as declining sales, higher costs and a depressed marketplace pulled the sector down into contraction for a third month in a row.

‘Supply chain managers were buying less as customers either failed to place orders or cancelled work in hand. 

‘This slowdown was across the board as both domestic and export orders fell, impacted by concerns over transportation difficulties, disruptions in Felixstowe and longer lead times. 

‘A shortage of components particularly made the completion of finished goods more difficult.’

The UK Government has stepped in to help businesses, capping the price they pay for electricity for six months with targeted support for heavy energy users – although details of the plan are yet to be revealed.

But firms will still face higher borrowing costs, as the Bank of England expects to bump up the base rate further in the coming months in a bid to rein in inflation.

Simon Jonsson, UK head of industrial products at KPMG, said: ‘UK manufacturing needs to raise its efficiency to deal with these threats, but raising efficiency will require capital investment. 

‘The risk of significantly higher interest rates in 2023 will increase this challenge.’

The S&P Global/CIPS UK Manufacturing PMI scored 48.4 in September, only a fraction higher than August’s 27-month low of 47.3

Dobson said that the latest slowdown in manufacturing added to the risk of the UK economy falling into recession.

‘With existing headwinds from the cost-of-living crisis likely to be exacerbated by the current volatility in financial markets, growing economic uncertainty and further increases in borrowing rates, the industrial sector is likely to remain in the doldrums during the coming quarter to add to deepening recession risks,’ he said.

The UK economy grew by 0.2 per cent in the second quarter, avoiding a technical recession, according to the latest official figures.

However, the economy’s overall size is smaller than previously estimated, 0.2 per cent below its pre-pandemic level, the Office for National Statistics said. 

This leaves the UK as the only G7 economy yet to recover above its pre-coronavirus pandemic level.