UK Manufacturing PMI Declines Amid BoE Governor’s Warning Of Cascading Brexit Impact Across The World

The looming Brexit uncertainty has taken its toll on the manufacturing and the services sector too, after giving a severe hit to the Construction. According to the latest release, the UK’s monthly Manufacturing Purchasing Managers’ Index (PMI) declined to its lowest level, since the second month of 2013. As per the data released by the IHS Markit/CIPS UK Manufacturing PMI remained in contraction mood for the second consecutive month, coming at 48.0 in June, down from 49.4 in May. The release showed that the headline IHS Markit/CIPS Purchasing Managers’ Index after removing the seasonal component of a time series, fell for the third consecutive month and marked its first back-to-back decline since February 2013. The weakening trend in the manufacturing segment started appearing from the month of April, when it declined to 53.1 from a reading of 55.1 in March.

Reduced intakes of new business led to lower output consequently, there was weak demand from domestic as well as foreign markets both. Also, there was a third consecutive month of decline in employment in the sector and confidence level dropped to one of its lowest levels since the inception of the survey. Intermediate goods sector remained one of the worst affected, posting the steepest decline in output as well as new orders of the industry, on the same time the optimism level too dipped to its third-lowest level since the commencement of the survey. There was some sense of respite in the consumer goods sector, which eked out modest gains but weakness in the rate of expansion was visible there too. Strong contractions were seen in intermediate and investment goods producers, indicating that businesses were not keen on increasing day-to-day as well as capital spending.

Last year though had been good for the manufacturing sector, contributed by the manufacturing of food products, which witnessed sales of £71.8 billion. Growth was also evident in the production of machinery and equipment. Fabricated metal products, and chemicals and chemical products too reported strong sales growth. On the same time, decline was visible in the production of motor vehicles, trailers and semi-trailers, as well as the other transport equipment.

The survey results showed that IHS Markit/CIPS services Purchasing Managers’ Index (PMI), just managed to hold the ground in expansion territory after slipping to 50.2 from 51.0 in May, in last over a decade it was one of the worst performances by the sector. Services however had witnessed a strong uptrend in May from 50.4 in April, supported by a modest rebound in new businesses and a sharp improvement in staffing levels. But fatigue started appearing in Services too in May when despite the business activity growth reaching a three-month high, the expansion remained muted. Subdued consumer and business spending led to fall in business spending for the fourth consecutive month.

Around 80% of the UK’s gross domestic product (GDP) is constituted by the Services sector. In the last ten years since 2008, the sector has logged an average growth of 1.6 per cent, becoming the best performing sector of the economy. Manufacturing’s share of UK economic output (in terms of Gross Value Added, GVA1) has been in steady decline for many decades, from 27 per cent in 1970 to 10 per cent in 2017. It suffered severely in the 2008 recession and still seems to be struggling with many manufacturing industries still finding it difficult to recover from the recession.

The Purchasing Managers' Index (PMI), is an economic indicator that surveys purchasing managers at the industry and gives a projection of the prevailing trend rather than looking to the past of industry. For manufacturing, it becomes vital as it provides useful insight to business decision makers, providing early access to data about the company’s performance, rather than waiting for the hard data to be released officially. The PMI mainly is based on five major survey areas, namely- new orders, inventory levels, production, supplier deliveries, and employment. The headline PMI is numbers between 0 to 100 and its reading above fifty indicates the sector is expanding, while a reading below fifty suggests the sector is in contraction mood.

The impact of the no-deal Brexit is not only going to impact the UK, but it can exacerbate, and the impact could result in a broader global economic slowdown. Mark Carney, Bank of England (BoE) governor who earlier too had raised his concern over the vote for Brexit, has said that global trade war and a no-deal Brexit will have a profound spillover impact on the global economy.  It was a warning from the BoE governor of a new geopolitical tension, starting with this level of protectionism, which could trigger a new Cold War coupled with high economic costs. Carney while taking the historic decision recently of keeping the interest rates on hold at 0.75 per cent, given inflation remaining below the 2 per cent target and uncertainty in UK's future relationship with the European Union has warned that smooth transition of Brexit and strengthening economy will lead to a rate rise. Meanwhile, the UK chancellor Philip Hammond too has expressed his concern and warned that a no-deal Brexit could cost the UK up to £90bn.

Trade war starts with a nations’ attempt to protect its domestic industry by raising and creating tariffs and trade barriers against each other. The trade war issue came on fore after the US increased tariffs on Chinese imports. The issue further got escalated with US President Donald Trump’s announcement that he would hike up tariffs on $200 billion of Chinese goods entering the United States. Starting June 1, China in retaliation announced increasing levies on $60 billion worth of the US goods. In a separate incident, it announced to create a blacklist of “unreliable” foreign firms. The move was mainly a retaliation to the US government's decision to ban Chinese tech heavyweight Huawei. The US had denied access to Huawei of the domestic markets and restricted its US sales. The trade war is a form of extreme protectionism by the nations but considering the size of economies like the US and China, the repercussions on overall global trade are inevitable. However, the situation cooled a bit, and some respite came with the two nations calling a truce after the US President Donald Trump at the Group of 20 meetings agreed to hold off on new tariffs and President Xi Jinping pledging to increase Chinese purchases of American products. Carney on the development has though said that “progress today is no guarantee of progress tomorrow”.

It’s not only the UK that has been suffering from weak economic growth, but the global economy overall is under the slowdown spiral. The global manufacturing sector continued to fade at the end of the second quarter, as the JP Morgan Global Manufacturing PMI - a composite index produced by JP Morgan and IHS Markit in association with ISM and IFPSM - fell to its lowest level for over six-and-a-half years in June and for the first time since second half of 2012 posted back-to-back a contraction reading More than 50 per cent of the nation among the 30 for which the June PMI reading was released, signaled contraction. While there was a continued weakness in international trade flow, global manufacturing employment too logged a mild decline for the second straight month.

Amid all odds, some rays of hopes appeared with data showing over 40 per cent of companies forecasting increase in output over the year and a modest rise in stocks of finished goods. Also, the average input price inflation slowed, and business tried to recover some of the previous months’ margins in June.

The service sector stocks were not looking much influenced with the weak PMI numbers, and most of them were trading higher on London Stock Exchange (LSE), Hays Plc (HAS) with a market cap of £ 2,355.31 mn was up by 1.80 per cent on 03-Jul-2019 (16:39:45 GMT). IWG Plc (IWG), an Industrial Support Services company with a market cap of £3,026.89 mn was up by 3.70 per cent, Intertek Group Plc (ITRK) with a market cap of £9,218.78 m surged by 34% as at 03-Jul-2019 (16:38:26 GMT). However, there was an exception too, Experian Plc (EXPN) a Professional Business Support Services company with a market cap of £22,229.95 m, was reacting negatively to the weak PMI numbers, trading lower by 3 per cent on 03-Jul-2019 at 16:36:09 GMT.

Though the UK’s economy is not showing any significant deterioration, it’s the global slowdown coupled with the fear of global trade war and a no-deal Brexit, which is impacting all the major economies across the globe. PMI has been primarily impacted by lower export orders, in the coming time the exchange rate volatility and gloomy global economic growth is also likely to keep pressurizing the trading conditions of the exporters. However, if the truce between the US and China extends despite so much of scepticism prevailing around, it will be beneficial for the whole global economy. For UK, the private consumption is going to be supported by the strengthening labor market, while the unemployment is likely to remain low, the average growth in earnings is predicted to increase. On one hand, there could be a slight improvement in manufacturing, the services sector is likely to witness further weakness going forward.