UK factories shed workers as higher costs and weaker spending pound finances

The UK's manufacturing sector fell deeper into contraction in December, while business optimism fell to its lowest level in a year, a closely watched survey suggested.
The UK's manufacturing sector fell deeper into contraction in December, while business optimism fell to its lowest level in a year, a closely watched survey suggested.

British factories are shedding workers after being pounded by soaring costs and weaker spending from customers, according to a closely-watched survey.

S&P Global and the Chartered Institute of Procurement and Supply’s (CIPS) final purchasing managers’ index (PMI) for the UK manufacturing sector came in at 47.8 points last month, above an earlier reading of 46.6 points.

The number was a three month low and slightly below the City’s expectations.

Softer client demand due to “uncertainty, customer destocking and efforts to control costs” squeezed new business pipelines, keeping the headline index below the 50 point threshold that separates growth from contraction, the survey said.

Firms also laid off staff in response to their swelling cost base and timid demand, with the PMI’s employment index dropping for the seventh straight month.

The Bank of England’s eleven straight interest rate rises has sent a chill through the manufacturing economy. Factories rely on credit to finance activity, so higher borrowing costs, now at 4.25 per cent and tipped to rise again next Thursday, have meant some activity has become unviable.

Rob Dobson, director at S&P Global Market Intelligence, said: “The UK manufacturing sector remained in the doldrums at the start of the second quarter. Output and new orders contracted, as manufacturers felt the impacts of client uncertainty, destocking and tightening cost controls.”

“There was no escape from the subdued mood of the market, with both domestic and export customers remaining reticent to commit to new contracts,” he added.

Manufacturing is emerging as an anchor to UK economic growth. S&P Global and CIPS publish a separate survey that covers activity in the services sector, which generates a big chunk of UK output.

That index has been above the 50 point growth line for several months.

Gabriella Dickens, senior UK economist at consultancy Pantheon Macroeconomics, said: “A material recovery in demand is several months away. Consumer demand for goods likely will recover only slowly given that business surveys suggest employment merely will flatline over the coming months and still-high mortgage rates look set to reduce households’ real incomes by around one percentage point.”

There was good news in the PMI on the inflation front. Factories raised prices at the slowest pace for more than two years due to input – raw materials used by firms to make things – costs accelerating at the slowest rate in 35 months.

Prices have jumped 10.1 per cent over the last year in the UK but the rate of increase is forecast to fall quickly in 2023.