The fall in the manufacturing PMI in August to its lowest level since July 2012 suggests the industrial sector has continued to contract. But we doubt that manufacturing will pull the overall economy into recession.
Manufacturing is slipping into recession
- The fall in the manufacturing PMI in August to its lowest level since July 2012 suggests the industrial sector has continued to contract. But we doubt that manufacturing will pull the overall economy into recession.
- The decline in the headline PMI index from 48.0 in July to 47.4 in August was weaker than the consensus forecast and our own expectation of a small rise. It is consistent with manufacturing output falling by 1.5% q/q in Q3.
- The reduction was driven solely by a fall in new orders, from 46.9 to 44.4. And much of that was due to weaker external demand as the export orders balance fell from 46.5 to 43.8. Like the headline balance, those balances reached their lowest level since the height of the euro-zone debt crisis in 2012. Given the ongoing struggles of global manufacturing and the strong possibility of a no deal Brexit in two months’ time, it is hardly surprising that both domestic and external demand are suffering.
- What’s more, firms don’t appear to be stockbuilding ahead of a possible no deal Brexit, this time on the 31st October, as they did in Q1. The quantity of purchases balance was broadly steady at 49.8 whereas three months prior to the original March Brexit date it rose from 54.9 to 57.3. That suggests firms have kept up their inventory levels, and that Brexit preparations won’t prevent the sector contracting in Q3.
- Note, though, that a contraction in manufacturing output of 1.5% q/q in Q3 would be an improvement on Q2, when the sector contracted by 2.3%. What’s more, the survey might be worse than reality. The PMI didn’t capture in full the impact of unseasonal maintenance shutdowns of car plants in April which will provide a boost in Q3 when the shutdowns would normally take place.
- In any case, manufacturing is on track to contract for a second consecutive quarter. And a meaningful recovery is unlikely given the ongoing struggles of global manufacturing. The US manufacturing PMI slipped below 50 for the first time since 2009 in August. And while the euro-zone equivalent ticked up, at 47 it points to manufacturing output in the bloc continuing to contract. (See Chart 1.)
- But the services sector is typically unfazed by contractions in manufacturing. (See our UK Economics Update, “Will manufacturing drag the economy into recession?”.) And it was encouraging that the employment sub-balance was fairly resilient in August, ticking up from 47.7 to 47.8. So the weakness of manufacturing shouldn’t spill over into weaker consumer demand. Indeed, we expect the services PMI, due to be released this Wednesday, to rise in August which would confirm that the services sector has continued to shrug off the struggles of manufacturing. As a result, unless there is a no-deal Brexit, we still think that the UK will avoid recession.
Chart 1: IHS Markit/CIPS Manufacturing PMIs
Source: IHS Markit
Andrew Wishart, UK Economist, +44 20 7808 4062, email@example.com