Manufacturers ‘risk recession’ as Brexit stockpiling hits record highs

Storm clouds are gathering above Britain’s manufacturers, as positive sentiment in the industry fell to a 30-month low in January amid record levels of stockpiling in the run-up to Brexit.

Manufacturing activity fell to a three-month low in January, as stocks of purchases rose at a record rate, according to the latest Purchasing Managers' Index (PMI).

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Britain’s PMI score fell to 52.8 for the month, down from 54.2 in December, driven by the weakest growth in production volumes in two-and-a-half years.

A score of 50 or above signifies growth, while below shows contraction in the sector.

Sterling fell from 1.31 against the dollar to 1.305 after the dreary figures landed.

Ongoing concerns about Brexit and a European economic slowdown present a “clear risk of manufacturing sliding into recession,” according to Rob Dobson, director at IHS Markit, which compiles the survey.

Although output rose solidly at consumer goods producers, this was largely offset by weaker expansion in the intermediate goods sector and the first decline in investment goods output since July 2016.

Inventory holdings in warehouses increased at the fastest pace in the 27-year survey history, as purchasing volumes expanded to the greatest extent since November 2017.

So hurried were firms’ efforts to stockpile that average vendor lead times lengthened markedly, as suppliers struggled to keep up with demand.

Inflation of input prices eased to a 32-month low, despite higher raw material costs, suppliers raising their prices and the exchange rate. Average selling prices also increased at a slower pace.

Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply (CIPS), said: “Businesses did their best to develop forward purchasing programmes to avoid potentially disappointing clients and in case of a bad Brexit outcome with some of the sharpest rises in raw materials and finished goods stockpiling since the survey started in January 1992.”

Brexit uncertainty, concerns around exchange rates and signs of a European economic slowdown all weighed on sentiment. The overall degree of positive sentiment dipped to a 30-month low. January also saw manufacturing jobs being cut for just the second time since mid-2016.

Meanwhile this morning, manufacturing PMI’s for Spain, Italy, France and Germany showed some evidence of an improvement -albeit a patchy one – in economic conditions in January. Spain improved to 52.4, from 51.1, however Italy weakened further to 47.8 from 49.2 – well below expectations of 48.8.

French manufacturing came in at 51.2, while German manufacturing contracted further, coming in at 49.7, below expectations of 49.9.

Dave Atkinson, head of manufacturing at Lloyds Bank Commercial Banking said: “A dip in the PMI will concern many. Our data shows there has been a rise in stockpiling by UK manufacturers and many are shoring up their supply chains amid disruption concerns, which isn’t necessarily indicative of ‘real’ and long-term sustainable growth."

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The news comes after the UK car industry warned the of “devastation” a no-deal Brexit would cause as figures released earlier this week showed manufacturing and investment plummeted in 2018.

UK car production fell to a six-year low of 1.52m units last year, while investment was slashed almost in half to just £589m, according to the latest data from the Society for Manufacturers and Traders (SMMT).