September purchasing managers survey points to loss of momentum after healthy third quarter for manufacturers - EY ITEM Club comments

02 October 2017

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  • September PMI indicates that the manufacturing sector faltered modestly at the end of the third quarter after a generally strong performance over the summer
  • Output growth eased back in September with a slowdown in all sub-sectors. Additionally, new orders growth lost some momentum
  • It still looks likely that the manufacturing sector saw decent growth in the third quarter after contraction of 0.3% quarter-on-quarter (q/q) in the second quarter
  • Outlook for manufacturing appears somewhat mixed as a promising export environment is countered by challenging domestic conditions
  • Expectations that the Bank of England could raise interest rates as soon as November will likely be fueled by the survey showing increased price pressures in September. Manufacturers’ prices charged climbed to a four-month high in September as input prices increased at a markedly increased rate

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

“The September Markit/CIPS manufacturing purchasing survey pointed to a slight loss of momentum after a decent third quarter.

“The headline index eased back to 55.9 in September after improving to a four-month high of 56.7 in August (and the second highest reading since June 2014) from 55.2 in July and a three-month low of 54.2 in June.

“Consequently, manufacturing PMI averaged a healthy 55.9 in the third quarter, which was the same as in the second quarter and up from 54.7 in the first quarter.

New orders growth slowed modestly in September
“The survey indicates that new orders growth slowed to a three-month low in September while remaining at a decent level. Export orders were at a three-month low but still elevated compared to long-term norms as they benefited from a competitive pound and healthy global growth. However, there were reports that the boost from the weakened pound were less marked than earlier in the year.   

“There also appears to have been a slight moderation in domestic orders in September.

“Output growth slowed modestly in September from a seven-month high in August. Slowdowns were reported across all sectors – consumer, investment and intermediate goods sectors.

“Similarly, employment growth in the sector was decent in September but eased back from August’s best level since June 2014 while manufacturers’ optimism slipped from a three-month high.

Bank of England will note rising price pressures
“The survey pointed to manufacturers’ output prices rising at the fastest rate since May in September. This was influenced by companies looking to pass on higher input costs which picked up markedly to rise at the fastest pace since March. This was due to higher commodity prices, the weak pound and reported supply-chain constraints.

Manufacturing output saw its best performance for 2017 in July which had boosted hopes for strong growth in third quarter
“A notable feature of 2017 has been that manufacturing surveys have been appreciably stronger than hard data from the Office for National Statistics. In particular, surveys from the CBI and the purchasing managers pointed to the manufacturing sector seeing clear expansion in the second quarter. Nevertheless the ONS reported that manufacturing output contracted 0.3% quarter-on-quarter in the second quarter.

“However, hopes that the manufacturing sector would see decent expansion in the third quarter was boosted by the ONS reporting that output expanded 0.5% month-on-month in July, thereby recording its best performance this year. This was buoyed by strong output of motor vehicles, which can be volatile from month to month.

The outlook for manufacturers appears somewhat mixed. . .
“The outlook for manufacturing appears mixed with a promising export environment countered by challenging-looking domestic conditions.

“On the export side, a very competitive pound and healthy 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 would help manufacturers of intermediate products.

“On the domestic front, increased prices for capital goods and big-ticket consumer durable goods, weakened consumer purchasing power, and economic and political uncertainty threaten to hamper manufacturers. Businesses’ willingness to invest and buy capital goods is being tested by economic, political and Brexit uncertainties.”

ENDS