U.K. manufacturing sector hints at contraction, IHS manufacturing PMI index falls to 49.4 in May

The IHS manufacturing PMI index for the U.K. fell sharply in May, entering the contraction territory. The index dropped to 49.4 in May from April’s 53.1, the first sub-50 outturn since July 2016. However, unlikely in August 2016, a solid rebound in June seems unlikely which is expected to record average reading for the PMI in the second quarter, print below the 53.3 average recorded in the first quarter, indicating towards some payback in manufacturing output after the 2.2 percent growth pace seen in the quarter, said Lloyds Bank.

Before the release, a fall in the manufacturing PMI had generally been anticipated as the boost from preparations for a no-deal Brexit that underpinned the first quarter activity, unwound in the second quarter. Delving into details, two measures of the survey that capture stockpiling activity, both stocks of finished goods and stocks of purchases dropped in May. Especially, the latter reversing much of the sharp rise seen in the first quarter.

The indices of output and new orders fell to 50.3 and 48.6, respectively. The fall of new orders index below 50 is especially concerning and also shows the deterioration in global trade in recent months. A measure of new export orders fell to 46.2, its lowest since October 2014. Companies attributed lower inflows of work from both Asia and Europe with Brexit uncertainty leading to “EU-based clients altering their supply chains away from the UK”, according to IHS Markit.

The prospects for manufacturing activity depends greatly on companies’ perception of the Brexit outlook. A resurgence in Brexit-related anxiety might yet see firms once again step up their preparations, while more certainly over the outlook might permit companies to further ease back on their contingency planning.

“With the manufacturing sector accounting for ~10 percent of UK GDP, the focus in terms of the wider economy now shifts to the construction and services PMI releases in the coming days (Tuesday and Wednesday respectively). While we expect modest pick-ups in both, overall the surveys are expected to point to weaker economic growth in Q2 compared to Q1’s 0.5 percent rise”, added Lloyds Bank.

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