The downturn in the UK manufacturing sector deepened at the end of 2024, as December saw rates of contraction in output, new orders and employment gather pace.
Destocking at clients, subdued market confidence and operational restructuring in response to forthcoming legislative changes hit output and demand and reinforced ongoing efforts to achieve cost efficiencies.
The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) fell to an 11-month low of 47.0 in December, down from 48.0 in November and below the earlier flash estimate of 47.3. The PMI has remained below its neutral mark of 50.0 – signalling deterioration – in each of the past three months.
Manufacturing production contracted for the second consecutive month in December, with the rate of decline accelerating to its fastest since January 2024. The downturn was widespread in nature, with similarly sharp rates of decline across the consumer, intermediate and investment goods industries.
Although output was scaled back at SMEs and large-scale producers alike, the downturn was noticeably deeper at SMEs (a similar picture was painted with regard to new work intakes). Lower production volumes mainly reflected subdued domestic market sentiment, customer destocking, efforts to prevent inventory building up at manufacturers' own warehouses and the impact of weaker demand from European clients.
Total new business fell for the third straight month and at the quickest pace since October 2023. There was also some mention of some UK-based clients scaling back on purchasing in light of the higher cost environment, sometimes linked to restructuring operations in advance of forthcoming rises in labour costs and payroll taxes. December saw the fastest reduction in overall export sales for ten months.
Steep drops in foreign demand were registered in both the intermediate and investment goods industries, in contrast to a mild uptick in new export order wins at consumer goods producers. Where a decrease was reported, there was mention of lower order intakes from clients in Europe, Asia and the USA.
The current downturn and manufacturers' weakened outlook for the economy had negative impacts on business confidence and employment during December. Optimism dipped to a two-year low, with sentiment declining across all three of the sub-sectors (consumer, intermediate and investment goods) and company size categories (small, medium and large) monitored by the survey.
Manufacturers reported concerns about a lack of market confidence, inflationary pressures, rising costs (especially for employer NI and payrolls) and expectations of weaker economic growth looking ahead. Manufacturing employment fell for the second month running, with the rate of job cutting hitting a ten-month high. Some firms noted that they were taking action in response to weak market conditions and that forthcoming increases in employers’ National Insurance and the NMW\NLW had encouraged cutbacks to working hours and longer-term efforts to restructure workforces.
Cost caution also led to a reduced level of input purchasing and intentional depletion of inventories of both inputs and finished products. Purchase price inflation edged higher in December. Anecdotal evidence cited rising transport costs and raw material prices, as well as the pass through of higher employment costs by suppliers. There were also reports of rising global market prices, material shortages, taxes and currency fluctuations.
Current and expected future cost increases led manufacturers to pro-actively raise their selling prices. Supply-chain pressures continued to build, as the ongoing Red Sea crisis and disruptions to shipping and at ports led to an increased incidence of delivery delays.
Rob Dobson, Director at S&P Global Market Intelligence “A stalling domestic economy, weak export sales and concerns about future cost increases led to the steepest contraction of UK manufacturing production for almost a year in December.
“Manufacturers are facing an increasingly downbeat backdrop. Business sentiment is now at its lowest for two years, as the new Government's rhetoric and announced policy changes dampen confidence and raise costs at UK factories and their clients alike. SMEs are being especially hard hit during the latest downturn.
"This is sending a winter chill through the labour market. December saw the sharpest cuts to staffing levels since February. Some companies are acting now to restructure operations in advance of the rises in employer National Insurance and minimum wage levels in 2025. Global market conditions are also providing a growing headwind, with export sales hit by lower demand from Europe, Asia and the US.
“The survey price gauges edged higher, reflecting rising transportation, labour and material costs, in some cases due to supply chain stresses pushing up global market prices. With costs expected to rise again in early-2025 as the announced Budget changes come into actual effect, the Bank of England is likely to remain cautious about further interest rate cuts despite rising signs of economic difficulties."
