EEF blog

Yesterday we saw the release of the Manufacturing Purchasing Managers Indices (PMIs) around the world. When looking across the data and the direction of travel in the PMIs some geographical patters can be seen.

The Gainers

The Eurozone
The Eurozone composite PMI is rose to 48.3 in May, indicating the slowest pace of contraction since February 2012. The improvement in PMIs in May was widespread and was seen in all Eurozone countries. However, the indicator remains firmly in negative territory indicating contraction.

The UK
One of only two countries in positive territory which also saw an improvement in the PMI, the UK PMI remained in positive territory for the second month in a row after the April PMI was revised above the 50 mark.

Canada
Canada, like the UK saw an improvement in its PMI while remaining in positive territory. The country’s PMI has remained relatively consistently above the neutral 50 mark since the end of the recession, with only one month late last year indicating contraction.

The Losers

BRIC economies
Worryingly, these large markets are all hovering close to the neutral mark and all saw their PMI fall in the month of May. These changes reflect the weaker than expected economic data for 2013q1 but does not bode well for global growth prospects if this continues. In China, recent policy changes focused on achieving more balanced growth through higher domestic consumption will have widespread consequences for industry and trade around the world.

The US
The US ISM Manufacturing index yesterday indicated the sector was in contraction, coming in below the neutral mark at 49. While the economy has shown strong growth coming out of the recession, more recent signs indicate some slowing in the pace of expansion.  

South Korea
The fall in South Korea’s PMI reading likely indicated the impact of slowing global economic conditions, particularly the weakening in China. However, the PMI remains above the 50 mark showing the sector in expansion.

Manufacturing PMIs around the globe
Purchasing Managers Index, 50=neutral

Today we had a couple more positive pieces of data release relating to the end of last year. December has proved to be a much stronger month than originally expected and this may be a tentative sign of markets beginning to pick up and stabilise.

The PMI hinted at a strong end to 2012 for the UK…

• The positive 51.4 manufacturing PMI for December gave us a positive surprise telling us that orders on balance were up for the UK.
• January’s PMI was slightly weaker at 50.8 but remained above the crucial neutral-50. 

While the UK is looking more positive that it did for much of 2012, some of the UK’s key markets give us a bit of a mixed picture.  Our European counterparts continue to struggle and are firmly in contraction and, while there is some variation between countries, most PMI's remain below the 50 mark. The US and China look better with above 50 PMIs signalling improving operating conditions for the manufacturing sector in these respective economies.

…and today’s data confirms that the manufacturing sector finished 2012 on a high note

• Manufacturing output rose by 1.6% in December after contracting 1.2% in October and 0.4% in November. Combined this led to a small upward revision to manufacturing output to a contraction of 1.3% in 2012q4.
• The UK’s balance of trade improved to £3.2bn in December, from £3.6bn in November.
• Goods exports to EU countries fell £0.6 billion in December but rose to non-EU countries by £1.4 billion. 

Patterns of UK trade have been shifting over time with around 50% of our exports now going outside of the EU. This is up from 38% in 2002. However, the EU remains an important trade partner and, with economic conditions continuing to look worrying in the year ahead for the Eurozone, companies that export heavily to the EU may find 2013 to be quite tough.  Manufacturers with trade links outside of the EU will likely fare much better as exports grow faster and demand for products from emerging markets is expected to pick up. 

Today’s PMI is a positive surprise as we start off the New Year telling us that 2012 ended more strongly than expected and beating expectations by a considerable amount. The consensus forecast was for an unchanged negative outturn with the headline index expected to rise to 49.7 from 49.1 in November.

Instead the December PMI surprised us at a positive 51.4

The rise in output and orders at the end of last year is a positive signal that the sector can continue to grow in the year ahead

This positive PMI indicates that more manufacturers saw production increase than decrease in December. This is the highest PMI recorded for 15 months and is also the first time since April 2012 that the PMI has been back in positive territory.

However, the strength of recovery will continue to depend on what happens in other parts of the world

A major area of concern remains exports which showed a contraction – export orders remained below the neutral 50 while overall orders were above 50. Looking out to those key export markets shows that things are still looking patchy.

• The Eurozone continues to struggle and the Eurozone PMI remained relatively unchanged at 46.1, down from 46.2 in November.
• The US fiscal cliff deal that was agreed yesterday has provided some relief to the risks and has lifted markets around the world as they opened for business in 2013. This is not the end of the challenges though and more decisions will need to be taken in the year ahead. 

UK manufacturers and exporters, in particular, will be hoping to see stability in the eurozone and signs that demand will continue to hold up in the US and emerging economies in the coming months.   

PMIs across most of the Eurozone improved in August…

Yesterday Markit economics published its monthly PMIs for the UK and the Eurozone. The composite PMI for the Eurozone improved from 44 in July to 45.1 in August as did many of the larger Eurozone economies. 

… but they are still squarely negative.

The international environment does not bode well for export-focused manufacturers and continues to threaten the export-led recovery we have been hoping for.

• Ireland has been an outlier for most of this year. However, the drop in August brings Ireland closer to the negative territory that all other Eurozone countries have been in for the large part of 2012.
• The easing of the PMI in countries such as France, Germany and Spain may be an indication that that pressure is starting to ease off. But remaining in firm contraction territory they signal that the manufacturing sector is likely to continue to drag on Eurozone growth into the third quarter of 2012.
• The US PMI worsened slightly from 49.8 to 49.6  and the Fed has recently hinted that further quantitative easing might be on the cards.
• China, worryingly, has worsened once again as the uncertainty stemming from the Eurozone drags on growth prospects. The Eurozone crisis has permeated confidence around the world and emerging markets are feeling the pinch.

As Lee discussed in her blog yesterday, the weakening in economic indicators over the past few months, the slowdown in output and orders in our Business Trends survey and the worsening trade balance led us to lower our forecast for the year ahead. Unfortunately yesterday's PMIs reinforce the view that times look challenging for export-led manufacturers.

Our first look at the UKs vital signs in August unfortunately does not provide much positive news.  Today’s Markit economics release shows the UK manufacturing PMI has hit a 38-month low of 45.4.

Below the headline figure, UK output and orders fell sharply as did input prices.  Selling prices continued to rise and employment rose slightly.  The employment story is somewhat interesting; despite poor indicators manufacturers continue to increase employment, leaving us with a question to ponder – does this suggest manufacturers are planning for things to pick up later on this year?  Or is this a temporary adjustment to complete existing order?

The big worry is that UK demand is being hammered by persistent weakening in key Eurozone markets and slower growth in the US and emerging economies.  On our blog tomorrow we will look at how the UK PMI compares internationally.

Last week we saw that the recent falls in official data can in a large part be attributed to the one-off Jubilee celebrations.  Falls of the extent experienced should not have been unanticipated and were, in fact, better than previous Jubilee celebrations. 

However, the weak PMI for the UK places a significant question mark over whether we will see the bounce back we need in the second half of the year.  Getting growth back on track needs to be a priority for the government. 

The recess comes at a good time.  It offers the perfect opportunity for the government to crystallise and be ready to provide more clarity on how it plans to get the economy growing again.

Today’s economic data release on UK GDP growth in the third quarter showed a modest upside surprise. But the simultaneous Manufacturing PMI 28 month low doesn’t bode well for the remainder of the year.

The GDP result was ahead of most analysts’ expectations of a 0.3% rise, mainly on the back of stronger growth from business and financial services.

Manufacturing grew too; though at a modest 0.2%, which only equalled the performance of the weak second quarter. And the fourth quarter seems to have opened even more weakly with today’s 47.4 PMI reading indicating contraction in October.

Most concerning in the PMI data is the dive in the new orders reading reaching 44.

So what’s driving this?

Weakness on the domestic side of the economy is the result of well-known factors. The drag on consumption continues from high inflation, a weak housing market, and high unemployment.
The contraction in government spending seems to be showing up most clearly in terms of the number of public sector jobs with some reports suggesting the OBR’s initial forecast may be too light.

These weaknesses remain with us.

The major change since the start of the year, when manufacturing was growing strongly, is the weakening in external demand.

We have increasingly heard from manufacturers saying the continuing problems resolving the eurozone debt crisis were causing firms, particularly SMEs, to hold off investment and recruitment.
What today’s PMI suggests is that the uncertainty and doubt on the strength of future demand that the crisis has created is now spilling into customers’ orders. Worryingly this seems to be impacting markets both within and outside Europe.

As concerning as this is, we still expect growth in the sector to return particularly as demand from emerging markets strengthens. For example, though coming from a low base, quarterly goods exports to China have increased 16% in the 3 months to August 2011 compared with the 3 months to August 2010. These are growing markets.

In the medium term manufacturing is still at the heart of an economy characterised by a greater reliance on trade and investment as sources of growth.

But what today underlines for us is that clearly growth cannot be taken for granted. Europe still accounts for half our exports. And the seriousness of the debt crisis is reaching much further afield.
For this reason we consider more than ever the government must use its Autumn Statement to provide a much stronger focus on growth.

The government cannot decisively change the situation in Europe but it can offset manufacturers’ caution regarding investment by introducing 100% capital allowances for two years.

The government can also match its action with its rhetoric by getting serious about growth enhancing policy reform, especially in terms of reducing the burden of taxation and regulation and increasing the flow of finance and skilled workers - see our blogs for more detailed suggestions.