Manufacturing PMI at 53.9 in May Input price inflation at near four-year high Supply chains remain under pressure…
May saw the upturn in the UK manufacturing sector gather pace, with the rate of expansion in production volumes hitting a three-month high. However, companies continued to face significant challenges, especially relating to supply chain disruption, material shortages and rising purchasing costs.
The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index™ (PMI®) rose to a four-year high of 53.9 in May, up slightly from 53.7 in April. The PMI has remained above its no change mark of 50.0, signalling expansion, for seven successive months.
All five of the PMI sub-components (new orders, output, employment, suppliers’ delivery times and stocks of purchases) were at levels normally consistent with an improvement in operating conditions in May. This was the first time such coalescence has occurred since May 2022.
Manufacturing production increased for the second successive month, led by expansions in the intermediate and investment goods industries (consumer goods output fell slightly). That said, there are signs that the recent growth acceleration could prove short-lived, as some manufacturers noted that clients were front-loading purchases to mitigate expected price rises and supply chain disruption.
These precautionary factors contributed to increased intakes of new business during May. New work inflows improved for the sixth successive month, with reports of higher demand from both domestic and overseas clients. New export business rose for the fifth month in a row, amid reports of improved intakes from mainland China, Europe, Japan, North America and South Korea.
UK manufacturers reported substantial pressure on both their input prices and supply chains during May. The rate of increase in purchasing costs accelerated to a near four-year high, reflecting increased prices for chemicals, electronics, energy, foodstuff, fuels, plastics, metals, packaging, paper and timber. The war in the Middle East, commodity market gyrations, geopolitical strife, supply chain issues, material shortages, tariffs, rising labour costs and higher taxes were also mentioned.
Supply chains remained under significant duress in May, as signalled by a further steep lengthening of average vendor lead times. Increased delivery times were linked to shipping delays, with particular focus on the impact of war in the Middle East and restrictions to passage through the Strait of Hormuz.
Concerns over supply chain disruptions and rising purchase prices also led to increased purchasing and stock building at UK manufacturers. May saw input buying volumes raised for the second successive month, leading to the first increase in stocks of purchases in over three-and-a-half years. Moreover, the rate of expansion in inventory holdings was the fastest since July 2022. Stocks of finished goods rose, albeit only slightly, for the second consecutive month.
Average selling prices increased at the quickest pace since July 2022, with the step up in the rate of inflation the secondsteepest in the series history. Manufacturers linked the increase in selling prices to the ongoing upswing in input costs. Rates of increase accelerated across the consumer, intermediate and investment goods industries, with by far the steepest rise at intermediate goods producers.
Business optimism among UK manufacturers rose to a threemonth high in May, with almost half of survey respondents forecasting their output would rise over the coming year. Stronger market demand, new product launches, company growth targets, hopes for improved geopolitical conditions and rising export sales were all cited as reasons for positive sentiment. That said, one-tenth of manufacturers still expect output to contract, mostly due to continued uncertainty about government policy, higher costs and geopolitical turmoil.
Commenting on the news, Rob Dobson, Director at S&P Global Market Intelligence, said: “May saw the UK manufacturing upturn gather pace, as growth of production and business optimism both rose to three-month highs.
“The sustainability of the upturn remains in doubt, however. The recent upturn in new order intakes that is driving the expansion in output is heavily reliant on both manufacturers and their clients front-loading purchases to mitigate expected war-related price increases and supply chain disruption. This bounce will fade once customers have built up sufficient safety stocks.
“These price and supply factors are also having a direct impact on manufacturers, with cost inflation rising to a near four-year high and pressure on supply chains leading to material shortages and longer lead times. This will continue to constrain manufacturers and put growth at risk for as long as geopolitical uncertainty, war in the Middle East and risks to key transport routes such as the Strait of Hormuz continue to pose a threat.”
“A robust order pipeline shows domestic and global demand remains. Manufacturers are responding by moving forward with recruitment as the employment index ticks up again. In addition, despite input prices remaining high, manufacturers continue to pass the increased cost burden onto customers.
He added: “Although, industry is demonstrating strength in the face of adversity, this will be tested as supply chain disruption and energy price volatility will start to squeeze as the conflict in Iran continues. However, as global shocks have become the ‘new norm’, UK industry has good experience navigating these challenges and is better equipped to withstand the turbulence.”
Thomas Pugh, chief economist at RSM UK, said: “The resilience of the manufacturing sector is encouraging, especially when compared with the weakness in the services PMI and the drop in the Nationwide’s measure of house prices this morning.
“However, the surge in input and output prices highlights that there is a substantial amount of cost inflation to come down the pipeline, at the same time as the economy is likely to weaken from its Q1 strength. For the Bank of England, apparent progress towards a peace deal in Iran and the drop in oil prices over the last week will be more important than some resilience in the manufacturing PMI. That means a rate hike at the next meeting later this month is off the table and it’s looking more likely that the Bank will keep interest rates on hold all year.”
