Manufacturing activity slipped to a 31-month low in December

  • December's manufacturing Purchasing Managers’ Index (PMI) fell to a 31-month low, continuing the sector's poor performance. Input shortages and a significant fall in new orders contributed to the decline in activity. With activity data for other sectors having been persistently weak, it appears likely that GDP fell again in Q4 2022. 

  • The survey pointed to a cooling in price pressures while headcount continued to fall. This should ease some of the Monetary Policy Committee’s (MPC) concerns that high inflation and a tight labour market could create the conditions for a wage-price spiral to develop. The EY ITEM Club expects the committee will press pause on this rate rising cycle soon. 

Martin Beck, chief economic advisor to the EY ITEM Club, says: “The manufacturing PMI fell substantially to 45.3 in December, from 46.5 in November. The decline in activity was broad-based with all five sub-indices signalling a weaker manufacturing environment. The sector continues to underperform its services peer and was on a downward trend for most of 2022.

“Manufacturers reported a further decline in new orders, reflecting a sustained squeeze on corporate budgets and weaker demand from overseas. These results are the latest in a series of weak indicators across the economy which suggest that GDP likely fell again in Q4 2022. Furthermore, with the squeeze on household and corporate finances set to continue, the situation is unlikely to improve in the near future.

“The survey pointed to a slowing in input cost inflation, while price pressures cooled as manufacturers sought to remain competitive despite weak demand. However, both cost and price inflation remain significantly above historic norms. Producers also reported a third consecutive decline in headcount. Together with a cooling of cost and price pressures, this may ease some of the MPC's concerns that high inflation and a tight labour market could create the conditions for a wage-price spiral. Therefore, the EY ITEM Club thinks the Bank of England is close to the end of its rate rising cycle, with Bank Rate likely to peak at 4%.” 

Nick Cosgrove, EY

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