British Manufacturing Output Bounces Back in July, driving the FTSE indices up

British Manufacturing Output Bounces Back in July, driving the FTSE indices up

Summary

  • Fastest growth rate observed in the IHS Markit/CIPS UK manufacturing PMI during the past three years
  • The main reason is that the British factories have reopened after the lockdown restrictions were lifted up, and are taking on more work orders
  • Consumer demand has also started to gradually pick up
  • However, the fear of continued job losses looms large and around 50 per cent of the nation’s manufacturers plan to layoff staff by the end of 2020
  • The UK manufacturing association seeks an extension of the job retention scheme for the next six months
  • The FTSE 100 and FTSE 250 indices closed higher by 2.3 and 1.33 per cent respectively on 3 August 2020

 

The Purchasing Managers’ Index (PMI) for British manufacturing sector for the month of July 2020 (calculated by IHS Markit/CIPS) was released on 3 August 2020. It estimated that the UK manufacturing PMI index shot up to a healthy level of 53.3 in July 2020, up from the last month’s (June 2019) corresponding value of 50.1, bringing good news for the growth of the economy. This is the highest rate of growth observed in the index since November 2017.

The manufacturing sector contributes to 10 per cent of the total economic output of the United Kingdom. It is the third largest sector in the nation after business services and retail.

The manufacturing output shrank drastically by 28 per cent during March to April 2020 in Britain, according to the government statistics. It recovered by 8 per cent during May 2020.

A number above 50 for the PMI index depicts growth while a number below 50 denotes contraction in the economic activity levels. So, two consecutive months of positive growth in the country’s manufacturing output is definitely a reason to cheer.

The factory output PMI index has also risen for other European countries such as France, Germany, and Spain for the month of July 2020. In fact, the IHS Markit/CIPS Eurozone PMI was recorded at 51.8 for the month.

The manufacturing sub-sectors that have grown faster than their counterparts for July 2020 are chemicals, energy, food, and pharma.

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On the other hand, the most sluggish sub-sectors continue to remain automobiles, steel, and aerospace. For instance, the motor vehicles sector is projected to contribute only 66 per cent to its gross value added during 2020, as compared to the last year of 2019 (according to estimates by Make UK).

Further, many sectors are suffering across the globe, like airlines. As per market estimates, global air traffic could fall by almost 45 per cent during 2020 with a total loss of £250 billion to the global airline industry.

Reaction of Make UK

Make UK is the industry association for manufacturers across the nation. James Brougham, its Economist commented that the number of orders have indeed improved for the month of July 2020, as a result of the efforts of companies to raise their output.

However, the economic impact of the coronavirus pandemic might take more time to completely go away, while the country’s manufacturing sector is back on the track of a sustainable recovery. This is especially applicable to the sectors which have been most badly hit. The index should show positive growth and optimism for more months to follow, the industry body opined.

The association is concerned about the prospects of employment in the coming few months across the nation. With organisations still struggling to survive, more job losses could be expected in the near future, which is worrisome, expressed Brougham.

Earlier the association had stressed on the need for an extension of the job retention scheme, at least for the strategic sectors, for another six months, to avoid mass staff layoffs. The results of Make UK’s Manufacturing Monitor survey should not be ignored, in this context. Released on 20 July 2020, the survey results revealed that more than half of the companies surveyed were planning to go in for redundancies during July to December 2020.

Employment Outlook

The IHS Markit/CIPS UK manufacturing PMI index witnessed a fall in employment during July 2020, which has been consecutively falling since the month of February 2020. The employment component of the index saw the highest fall during the month of March 2020, as a direct fallout of the coronavirus pandemic. The reasons cited for cutting jobs during July were alignment of output with capacity and reducing any wastages, apart from a drop in demand. Even the supply chain disruptions continue to exist. 

Market’s reaction

On 3 August 2020, the day of release of the IHS Markit/CIPS PMI index, the FTSE 100 closed by 135.09 points higher, up by 2.3 per cent as compared to a day ago. Positive economic news from the UK as well as around the world could be driving the market sentiments up. The FTSE 100 index closed at 6,032.85 points at the end of trading on that day. The index’s 52 week low / high range was recorded at 4,993.89 / 7,674.56.

Similarly, the FTSE 250 index also closed higher at 17,158.12 points on 3 August 2020, up by 1.33 per cent from the last trading day’s closing at 16932.65 points.

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The stocks also closed higher across Germany (with the German Dax rising by 2.71 per cent on Monday 3 August, 2020 at the day’s end) and France (with the French Cac increasing by 1.93 per cent during the same day).

To sum up, the IHS Markit/CIPS PMI index for British manufacturing sector increased to 53.3 in July 2020, up from a value of 50.1, observed for June during the same year. While it brings cheer to the economy, with a rise in new orders at the factories. However, there are some areas of concern. First, the recovery is not broad based and few sectors like automobiles, hospitality, and airlines still continue to be in the red. Second, employment levels are still falling, consecutively for the sixth month since February 2020, for the sector as whole. Unless the PMI levels continue to keep rising for the next few months and the government also supports the critical sectors, by maybe extending the furlough scheme beyond October 2020, further job cuts are anticipated, according to Make UK, the country’s leading manufacturing sector association.

 

 


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