There was a clear loss of manufacturing momentum in June, although the Marki/CIPS survey still points to decent growth over the second quarter. Weak domestic and export orders are disappointing for third-quarter hopes and the survey dilutes case for any-near term interest rate hikes. The outlook for manufacturers looks somewhat mixed.

Manufacturing Tools (PD)

By Howard Archer, Chief Economic Advisor to the EY ITEM Club:

While hardly weak, this is nevertheless a disappointing June Markit/CIPS manufacturing purchasing survey. The headline PMI from the CIPS manufacturing survey dipped to a three-month low of 54.3 in June, down from 56.3 in May.

Breakdown of survey shows widespread softening

The survey indicates that not only did output slow in June, but the sector is entering the third quarter with reduced momentum with new orders at an 11-month low. This was primarily due to weaker domestic demand, but it is disappointing to see that export orders slowed. Furthermore, the slowdown in manufacturing activity is reported across all sectors – consumer, intermediate and investment goods. Backlogs of work fell in June which also points to weaker activity going forward. Additionally, confidence among manufacturers dipped to a seven-month low in June, although it was still decent, and employment growth slowed.

Price pressures ease

Not only does June’s clear slowdown in manufacturing activity provide food for thought within the MPC, but it is notable that the rate of increase in manufacturers’ input and output prices both slowed further. Overall, the survey dilutes the case for any near-term hike in interest rates.

Questionable whether manufacturing sector expanded in Q2

Despite June’s slowdown, the survey still points to clear manufacturing expansion in the second quarter, with the second quarter PMI average of 55.9 the strongest for three years and well in growth territory (above 50).

However survey evidence for the manufacturing sector has tended to be markedly more upbeat than the official data from the Office for National Statistics (ONS) so far in 2017. Indeed, official data suggest that the manufacturing sector is far from guaranteed to see even modest growth in the second quarter. Manufacturing output was down by 0.7% in the three months to April compared to the three months to January.

The outlook for manufacturers looks somewhat mixed. . .

June’s slowdown in manufacturing activity fuels concern over the outlook for manufacturers. Increased prices for capital goods and big-ticket consumer durable goods, diminished consumer purchasing power, and economic and political uncertainty look likely to hamper manufacturers.

On the positive side – despite the disappointing June export orders – the overall substantial weakening of the pound and improved global demand should buoy UK manufacturers competing in foreign markets. The weakened pound could also encourage some companies to switch to domestic sources for supplies, which may help manufacturers of intermediate products.

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