IHS Markit/ CIPS Flash Data indicates Manufacturing Heading Towards Sharp Turnaround

Summary

  • Flash UK Manufacturing PMI is the first major survey in the last three months to forecast that manufacturing activity in the country is heading towards expansion
  • Sharp recovery also was seen in Flash UK Services Business Activity Index, Flash UK Composite Output Index, and the Flash UK Manufacturing Output Index
  • The robust recovery could very well be a sign that GDP may not shrink as sharply for the full year as was being previously envisaged

It may just be the biggest positive news to be hitting the stands in the United Kingdom this corona season. The Flash UK Manufacturing PMI for the month of June 2020 published on 23 June 2020 has shown that manufacturing activity in the country might have just entered into an expansionary phase. The index which separates the expansion and contraction phases at the point of 50, registered a 50.1 for June against a final manufacturing PMI of 40.7 in May. Ever since the lockdown was imposed the manufacturing activity in the country has gone down to record lows, leading many to worry that the path to recovery could be slow and painful. However, since the lockdown was opened, the recovery that has been witnessed in the months of May and June are quite sharp to boost the sentiments of the general public. It is to be noted here that only a few days ago the Chambers of British Industry (CBI) had expressed its concerns that the activity levels in the manufacturing sector are quite low to sustain a recovery, given the strict social distancing measures imposed by the government.

The IHS Markit/ CIPS PMI survey report published on the 23rd also came out with the Flash UK Composite Output Index, the Flash UK Services Business Activity Index, and the Flash UK Manufacturing Output Index. The Flash UK Composite Output Index for the month of June stood at 47.6 against May final UK Composite Output Index of 30, witnessing a jump of 17.6 points. On the other hand, the Flash UK Services Business Activity Index for June stood at 47, whereas the final UK Services Business Activity Index for May stood at 29, which is a jump of 18 points. The Flash UK Manufacturing Output Index for the month of June stood at 50.8 just crossing into the expansion zone, while the final UK Manufacturing Output Index for May stood at 35.0, a jump of 15.8 points. All the above indexes indicate towards a clear trend that the economy is picking up and the manufacturers in the country are buoyant despite the demand conditions not picking up so fast. It will be interesting to see if the manufacturer's order books also fill up as quickly as the purchasing managers are filling up their inventory bins.

The HIS Markit/CIPS has also observed that most of the manufacturers have started to offer discounts and are absorbing extra costs so as to spur demand and lure in old customers. However, despite that, new orders showed resistance to come by with new orders continuing to dip in June. The sectors which have been witnessing the biggest drop in demand are the engineering goods sector, automobiles sector and the aviation sector. It is to be noted here that all the above three mentioned sectors are highly export-oriented, and a virtual shutdown of international trade is severely affecting their fortunes.

The turnaround in all the above four indexes is also a testimony of how successful the government stimulus schemes have been. The furloughing scheme, which helped many of these manufacturers to retain many of their employees have been the greatest factor perhaps for the quick turnaround. The furloughing scheme, along with the bounce-back loan scheme and the loan guarantee scheme, also helped many of the manufacturers from sinking deep into the red and keeping the operations together. The government continues to provide full support to these schemes and has promised that no abrupt withdrawal of the schemes will be made till all beneficiaries are back on their feet.

The three-phase lockdown opening plan of the government has also laid great emphasis on the manufacturing sector and had prioritised the opening of factories during the first unlocking over other trading and services industries. There are several sub-sectors in the manufacturing industry which are critical for the functioning of the British economy and has also received the utmost priority by the government. The power production industry, the water treatments plants and the petroleum refining industry are a few that come under this category upon which the functioning of the day to day lives and of the other industries depend critically. However, it is interesting to note at this point, that many of these factor resources have become cheaper in the past three months due to acute drawdown in their demand and the industries who have opened up their factory shutters early had been enjoying a significantly low operating cost advantage.

In the past three months, several national and international organisations have made predictions about where the British economy is likely to end up by the end of this year. The IHS Markit/ CIPS manufacturing index publication for the month of June, however, throws the most optimistic picture for the year, it states that the British economy for 2020 would shrink by about 11.9 per cent while making a relatively moderate comeback of 4.9 per cent in the year 2021.

Chief business economist, Chris Williamson at IHS Markit categorically states that the recovery of the economy depends on how early the country is able to share off the coronavirus pandemic threat and take down the social distancing measures, which are taking a heavy toll on businesses who are trying to recover from the lockdown. Uncertainty and high rates of joblessness are also strong factors which will dictate whether the ongoing strong momentum in the sector will be sustainable or not. At this time, all hopes are pinned on the early development and availability of an effective vaccine, which will go a long way to bring back the country to normal.


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