Friday, September 24, 2021

Rising supply chain constraints lead to slower production growth and rising input prices in August

UK manufacturers continued to face rising constraints caused by supply chain issues during August.

Shortages of inputs and delivery delays disrupted production schedules, leading to slower output growth, and also resulted in marked increases in input prices. Companies nonetheless still achieved solid gains in output, new orders and employment.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to a five-month low of 60.3, a tick below July’s 60.4 but above the long-run average of 51.9. The PMI has signalled an improvement in operating performance in each of the past 15 months.

Manufacturing output rose again in August, albeit to the weakest extent since February. Growth eased particularly sharply at intermediate goods producers. Companies linked
higher output to new order gains and the ongoing process of re-opening global economies.

Incoming new business rose in August, reflecting increased inflows from both domestic and overseas markets. On the export front, manufacturers reported increased orders from
clients in Europe, China, the US, Asia and South America.

The outlook for the UK manufacturing sector also remained bright in August. Almost 66% of companies indicated that they expect output to rise over the coming year, compared
to only 4% forecasting a decline. Confidence rose to a three month high, reflecting expectations of continued economic revival, stronger global demand, investment plans and
hopes that current supply issues would either lessen or even be fully resolved.

Robust confidence among manufacturers supported further job creation during August. Employment rose for the eighth month in a row and to one of the greatest extents in the
survey history (albeit also the slowest since April). Staffing levels were raised to increase capacity, meet rising demand requirements and start addressing backlogs of incomplete
work.

However, there were also reports from some manufacturers of both labour and skills shortages.

Price inflationary pressures continued to build in the UK manufacturing sector in August. Average purchase prices rose at the fourth-fastest rate in the survey history, beaten only by the cost increases seen during May, June and July. A wide range of items were reported as up in price, as shortages and delivery issues left rising demand chasing reduced supply.

Average supplier lead times lengthened to the second greatest extent in the survey history during August. The only time when delivery delays have been more pronounced was in April 2020 during the first COVID-19 lockdown.

Input shortages, shipping delays, a lack of port capacity, transportation issues, Brexit and shortages of logistic industry staff all contributed to delivery delays. Manufacturers were able to pass on a part of the increase in costs to clients during August. Average selling prices also rose at one of the quickest rates on record.

Commenting on the latest survey results, Rob Dobson, Director at IHS Markit, said: “Severe disruptions to supply chains and raw material shortages eroded the growth momentum of UK manufacturing in August.

“Although solid gains in output and new orders were achieved, companies reported that production, delivery and distribution schedules were experiencing substantial delays.

“A wide range of factors contributed to the disruption, including port capacity issues, international shipping delays, the re-imposition of COVID restrictions at some key points in global supply networks and ongoing issues post-Brexit. With all of these factors likely to persist for the foreseeable future, manufacturing could well see a further growth slowdown in the coming months.

“The impact of supply issues is also feeding through to rapid price inflation. Rates of increase in both input costs and selling prices remained close to record highs in August, as
rising demand chased constrained supply and companies moved to pass on price increases to clients and consumers alike. This is affecting most markets, but especially autos, metals, food stuffs and electronics.

“Business confidence remained elevated despite the widespread shortages as firms focused on the longer-term outlook and brought back furloughed workers. However, the solid jobs growth seen in August could soon wane if supply disruptions and shortages of both labour and required skills continue to worsen.”

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