UK manufacturing contracts as Red Sea crisis hits supply chains, but sector thinks positive

The downturn in the UK manufacturing sector continued at the start of 2024. January saw output and new orders decline further, leading to additional job losses and cutbacks in purchasing and stock holdings, according to the latest S&P’s global UK manufacturing Purchasing Managers’ Index.

Manufacturers also experienced rising supply chain difficulties, as the Red Sea crisis led to the re-routing of input deliveries away from the Suez Canal.

The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ IndexTM (PMI®) posted 47.0 in January, up from 46.2 in December but below the earlier flash estimate of 47.3. The PMI has signalled a deterioration in operating conditions in each of the past 18 months. Four out of the five PMI sub-components – output, new orders, employment and stocks of purchases – were showing trends consistent with overall contraction.

Manufacturing production decreased for the eleventh successive month in January, with the rate of contraction unchanged from December's solid pace. Companies linked lower output to weaker new work inflows, efforts to reduce inventory holdings and disruption caused by supply chain delays. Where an increase was reported, there was mention of work on existing contracts being used as a substitute for new orders to support production volumes.

The start of 2024 saw manufacturing employment lowered for the sixteenth month in a row. Companies linked job losses to the ongoing downturn in the sector, which also contributed to cutbacks in purchasing activity and stock holdings. Input buying volumes fell for the nineteenth successive month. Finished goods inventories fell at the quickest rate in almost two-and-a-half years, while the reduction in input stocks was the joint-steepest since November 2012 (matching that registered in August 2023).

But UK manufacturers maintained a positive outlook despite the current downturn and persistent weakness of demand. Business optimism rose to a four-month high, reflecting new product launches, expectations of economic recovery and planned marketing efforts. That said, some firms remained concerned about weak market conditions and the risk of losing clients due to rising costs.

Rob Dobson, Director at S&P Global Market Intelligence, said: “The downturn in UK manufacturing continued at the start of 2024, with output, new orders and employment all reduced in January. The contraction was widespread, with declines in all three variables seen across the consumer, intermediate and investment goods sub-industries. The ongoing weakness is leading to an increasingly cost- cautious approach at manufacturers, compelling cutbacks in purchasing and stock holdings as companies aim to achieve efficiencies, protect cash flow and defend fragile margins.

"Cost and stock management initiatives are being complicated by the Red Sea crisis. Diverting purchased inputs, especially those sourced from the APAC region, around the Cape of Good Hope is raising prices and extending supplier lead times. Some of our panel members estimate that a minimum of 12-18 days could be added to some expected deliveries, disrupting production schedules and raising inflationary pressures at a time when manufacturers are already struggling with weak demand both at home and overseas. One small ray of light from the January data is manufacturers expect some of these issues may be temporary, with an increasing number (over 50%) still forecasting output to be higher 12 months out.”