Fall in UK Manufacturing Activity in May Less Severe Than Last Month

The manufacturing activity continues to be under duress in the United Kingdom during the month of May this year, as recorded by the Purchasing Managers’ Index (PMI) figures from IHS Markit and the Chartered Institute of Purchasing and Supply (CIPS). May’s PMI figure was at 40.7 points, which was higher as compared to the April 2020 number of 32.6. An Index figure of more than 50 indicates an increase in the manufacturing activity and less than that denotes a fall. So, manufacturing continues to remain in contraction territory for both April and May, primarily because of the coronavirus shutdown, which has brought the economy into a recessionary phase.

These final numbers are in line with the earlier released flash estimates of 40.6 for May this year.

Despite the fact that the Purchasing Managers’ Index gauges the market sentiments and is not a measure of the exact business activity, it remains an important barometer of the manufacturing industry’s health. The Index is calculated by surveying purchase managers across key manufacturing firms in the economy and asking them questions on changing business conditions with respect to the parameters of production, new orders, raw material and finished goods inventory, supplier delivery times and employment.

Production figures available do tend to match the dwindling factory outputs. For instance, in the leading manufacturing sector auto, the numbers of cars produced across Britain in April 2020 fell by almost 100 percent.

The factories are opening up gradually, but one needs to be watchful of the PMI Index figures for the coming months of June and July and wait to see when the Index crosses the comfortable 50 mark.

The recovery is likely to be slow as businesses have gradually started to open up their factories, adhering to social distancing norms and keeping all the precautions in place. This has been one of the toughest recovery scenarios that the UK’s manufacturing sector has ever faced.

Along with having to put up with the production-related challenges, the companies are also facing the far bigger issue of fall in orders with drying up demand.

These are precarious economic times, with people very anxious due to salary-cuts, across the board layoffs in many sectors such as airlines and tourism, and a minimal new hiring scene. A fall in earnings is thus translating into weak demand for all goods and services. People are not going to work, so transportation bills are down, not going on shopping sprees, not eating out with the lockdown still in the process of easing and new corona infections still being found each day. Then there is no spending on sports, haircuts or holidays, which then means a major drop in the country’s consumer spending.

Manufacturing seeks government support

With the industry facing unprecedented times, manufacturers are asking the government to handhold them as much as possible to sail through the tough time. Make UK- the national industry association- says that the government should provide measures that could help in redeploying skilled workers from areas of shrinking demand, in order to retain talent in the sector. They are also seeking direct state support to ensure short-term firms’ survival across the manufacturing sector.

Reportedly, Chancellor Rishi Sunak is likely to announce a new spending plan during the first week of July.

Recently on May 25, the government had announced a special contingency plan named the Project Birch, whose details are yet to come out. Under this plan, the government is mulling over issuing tailored bailouts to viable companies that have exhausted all options, including other government loan schemes. These bailouts could be in the form of government buying an equity stake in them or extending ongoing loan guarantees.

The sectors in dire need of support are tourism, aviation, steel, energy, automobiles and construction, among many others. The list is long. Firms are struggling to survive, and with a failure of top firms, there is a big chance of a large ripple effect through supply chain disruptions, further job losses and so on. Government is rightly thinking on the lines of support manufacturing to retain and raise employment in the near future. A keen business sense, as well as compassion, will drive the direction and size of the support.

How are some of the manufacturing biggies fairing?

As the lockdown approaches an end, it is only fair to have a closer look at a few big manufacturing players.

Unilever PLC (LON:ULVR) is the FMCG major into food, home care and personal care businesses. Its Q1 2020 results had revealed a flat 0.2 percent growth over the same period last year, with a turnover of €12.4 billion. It has announced a quarterly dividend for June 2020 at the value of €0.4104 per share. Unilever stock was trading at GBX 4,307, down 0.21 per cent, on June 2 at 12.54 PM GMT.

Anglo American PLC (LON:AAL), the British metals and mining giant, re-started its platinum business at the Waterval plant in early May this year after completing the repair works. In London, the Anglo American shares traded 2.9 percent higher at GBX 1,748.40 at 13.00 PM GMT on June 2.

AstraZeneca PLC (LON:AZN), the British-Swedish multinational pharmaceutical, is trying to develop a corona vaccine and has partnered with Oxford University for the same. Recently it also got $1 billion funding from the US government for an experimental Covid-19 vaccine. AstraZeneca stock is trading at GBX 8,554, down 1.72 per cent, on June 2 at 13:03 PM GMT.

Finally, even though the PMI Index continues to remain below 50, the good news is that it has started to move up. Pressure on manufacturing firms should reduce with the easing of lockdown restrictions, employees returning to work in full strength and demand to gain momentum hopefully. Moreover, with government support on the cards, the firms undergoing losses are less likely to experience the ache. With the slowing cases in the resurgence of infections, the worst of the output drop might be over. It remains to be seen how the manufacturing industry copes up with performance in these so-called ‘new normal’ corona times.