Friday, November 26, 2021

Soaring costs and supply chain problems result in manufacturers raising prices by largest amount in two decades

The manufacturing upturn slowed further at the start of the fourth quarter, as output growth was constrained by rising supply chain disruption, staff shortages and declining intakes of new export work.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) posted 57.8 in October, up from 57.1 in September, rising for the first time in five months. Although the PMI was boosted by improved growth of new orders and employment, alongside a steeper rise in stocks of purchases and lengthier vendor lead times, a further slowdown in output growth held back the headline index.

Manufacturing production rose only marginally and at the slowest pace for eight months. Companies reported that supply chain delays alongside shortages of raw materials, staff and certain skills had contributed to slower output growth.

Lower intakes of new export work also had an impact on production volumes. New export business fell, albeit slightly, for the second successive month. Companies reported that some overseas clients were cancelling or postponing orders due to longer lead times caused by port delays and freight capacity issues.

The domestic market held up better in comparison, offsetting some of the weakness in overseas demand. Overall new order intakes rose at a slightly quicker pace, linked to economic growth and clients increasing (or bringing forward) purchases to avoid expected supply chain delays and further price rises in coming months.

UK manufacturers maintained an optimistic outlook during October, with almost 62% expecting their level of output to increase over the coming year. That said, the overall degree of positive sentiment dipped to an eight-month low. Confidence was attributed to stronger global and domestic economic conditions, reduced disruption from Brexit, COVID-19 and supply-chain issues and also planned investment spending (including in automation).

Continued optimism at manufacturers, alongside signs of demand growth stabilising, encouraged stronger job creation during October. Employment rose for the tenth month running, with increases signalled at small, medium and large-sized enterprises.

Companies linked increased workforce numbers to higher output, recruitment campaigns, the replacement of leavers and rising backlogs of work. That said, there were also reports of ongoing staff shortages and difficulties in recruiting for certain skills. Work-in-hand rose at the third-fastest pace on record (beaten only by May and June of this year).

Input price inflation accelerated and remained among the highest seen in the survey history, with companies reporting a vast array of inputs as up in price. This fed through to output charges which rose to the greatest extent on record.

Commenting on the latest survey results, Rob Dobson, Director at IHS Markit, says: “Growth of UK manufacturing production slowed further during October, with output volumes rising only slightly and at the weakest pace for eight months. Strained global supply chains are disrupting production schedules, while staff shortages and declining intakes of new export work are also stymieing the upturn. This low growth environment is occurring in tandem with a severe upshot in inflationary pressures, with manufacturers reporting both a near-record increase in input costs and record rise in selling prices.

“There are also positive notes to take from the survey. A slight improvement in new order growth, led by the domestic market, suggests the trend in demand is stabilising following its recent slowdown. Businesses also remain relatively optimistic about the year-ahead outlook, with 62% expecting production to be higher. This alongside rising backlogs of work – a by-product of material and staff shortages – is driving a recovery in jobs growth. However, these positives could potentially be at risk if supply-chain, Brexit or COVID headwinds rise during the coming months, especially if high inflation leads to higher borrowing costs.”

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