Conditions in the UK manufacturing sector slowed sharply during October. Output growth weakened, while new order inflows and employment both declined for the first time since July 2016 (the PMI survey directly following the EU referendum). The drop in new business was partly driven by rising global trade tensions and Brexit uncertainties.

The seasonally adjusted IHS Markit/CIPS Purchasing Managers’ Index® (PMI®) fell to a 27-month low of 51.1, down from September's revised reading of 53.6 (originally published as 53.8). Data collection was undertaken between 12-26 October, closing before the Chancellor's Budget announcement on Monday 29th.

Companies linked the decline in manufacturing new orders to lower inflows of new work from overseas and softer growth of domestic demand. The weakness in total new orders was mainly centred on the consumer goods sector, as the intermediate and investment goods categories both posted mild expansions.

Foreign demand decreased for the second time in the past three months during October. Some companies reported that Brexit uncertainties had negatively impacted inflows of new work from within the EU. Others focussed more attention on rising global trade tensions and weaker demand from the world autos sector.

The deterioration in new orders led to a sharp slowdown in the rate of expansion of manufacturing production. Output growth was the weakest since the current sequence of increase began in August 2016. Growth was signalled in the intermediate and investment goods sectors, whereas the consumer goods category saw a mild fall in production.

The lacklustre performance of the sector filtered through to the labour market, with manufacturing employment declining for the first time since July 2016. Staffing levels rose at SMEs, but fell for the third straight month at large-sized companies. Where job losses were reported, this was linked to the decline in new work received, staff reorganisations, redundancies and efforts to control costs.

Cost-control initiatives and efforts to protect cash flow also contributed to a decline in raw material purchasing (the first since July 2016) and lower stock holdings. Inventories of finished goods and purchases both edged lower in October.

Input price inflation remained marked in October, despite easing to a 28-month low. Companies linked the latest increase to the higher costs of aluminium, energy, oil, steel and timber, rising import duties, exchange rate fluctuations, market volatility and Brexit uncertainty. Supply-side constraints also led to higher purchasing costs. Output charges rose at the slowest pace in just over two years.

UK manufacturers maintained a positive outlook in October, with over 48% expecting output to be higher one year from now. Optimism reflected new product launches, new capacity and export opportunities.

Rob Dobson, Director at IHS Markit, which compiles the survey:

“October saw a worrying turnaround in the performance of the UK manufacturing sector. At current levels, the survey indicates that factory output could contract in the fourth quarter, dropping by 0.2%. New orders and employment both fell for the first time since the Brexit vote as domestic and overseas demand were hit by a combination of Brexit uncertainties, rising global trade tensions and especially weak demand for autos.

"Alongside the halt in hiring, the increasingly defensive position of UK manufacturers was also reflected in the slight decreases in purchasing activity and inventory holdings, which firms linked to protecting cash flow and cost-cutting. There was some better news on the prices front, however, with input cost inflation dipping to its lowest for over two years as many global commodity prices fell.

"Looking ahead, manufacturers still maintain a positive outlook for production over the coming year, with 48% forecasting expansion. That said, the second half of the year so far has also seen confidence remain low compared to its long-run average, with views on prospects darkening again in October amid rising Brexit-related uncertainties and escalating global trade tensions."

Note to Editors:

Where appropriate, please refer to the survey as the IHS Markit/CIPS UK Manufacturing PMI ^® .

The IHS Markit/CIPS UK Manufacturing PMI ^® is based on data compiled from monthly replies to questionnaires sent to purchasing executives in over 600 industrial companies. The panel is stratified by Standard Industrial Classification (SIC) group and company workforce size, based on the industry and company size contributions to GDP.

Survey responses reflect the change, if any, in the current month compared to the previous month based on data collected mid-month. For each of the indicators the ‘Report' shows the percentage reporting each response, the net difference between the number of higher/better responses and lower/worse responses, and the ‘diffusion' index. This index is the sum of the positive responses plus a half of those responding ‘the same'.

Diffusion indexes have the properties of leading indicators and are convenient summary measures showing the prevailing direction of change. An index reading above 50 indicates an overall increase in that variable, below 50 an overall decrease.

The IHS Markit/CIPS UK Manufacturing PMI ^® is a composite index based on five of the individual indexes with the following weights: New Orders - 0.3, Output - 0.25, Employment - 0.2, Suppliers' Delivery Times - 0.15, Stock of Items Purchased - 0.1, with the Delivery Times Index inverted so that it moves in a comparable direction. The individual survey indexes have been seasonally adjusted using the US Bureau of the Census X-11 programme. The seasonally adjusted series are then used to calculate the seasonally adjusted PMI. IHS Markit do not revise underlying (unadjusted) survey data after first publication.

The Purchasing Managers’ Index ^® (PMI ^® ) survey methodology has developed an outstanding reputation for providing the most up-to-date possible indication of what is really happening in the private sector economy by tracking variables such as sales, employment, inventories and prices. The indices are widely used by businesses, governments and economic analysts in financial institutions to help better understand business conditions and guide corporate and investment strategy. In particular, central banks in many countries (including the European Central Bank) use the data to help make interest rate decisions. PMI surveys are the first indicators of economic conditions published each month and are therefore available well ahead of comparable data produced by government bodies.

About IHS Markit ( www.ihsmarkit.com )

IHS Markit (Nasdaq: INFO) is a world leader in critical information, analytics and solutions for the major industries and markets that drive economies worldwide. The company delivers next-generation information, analytics and solutions to customers in business, finance and government, improving their operational efficiency and providing deep insights that lead to well-informed, confident decisions. IHS Markit has more than 50,000 business and government customers, including 80 percent of the Fortune Global 500 and the world’s leading financial institutions.

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About PMI

Purchasing Managers’ Index ^® ( PMI ^® ) surveys are now available for over 40 countries and also for key regions including the eurozone. They are the most closely-watched business surveys in the world, favoured by central banks, financial markets and business decision makers for their ability to provide up-to-date, accurate and often unique monthly indicators of economic trends. To learn more go to https://ihsmarkit.com/products/pmi.html .

About CIPS

The Chartered Institute of Procurement & Supply (CIPS) is the world’s largest procurement and supply professional organisation.  It is the worldwide centre of excellence on procurement and supply management issues.  CIPS has a global community of 200,000 in over 150 countries, including senior business people, high-ranking civil servants and leading academics.  The activities of procurement and supply chain professionals have a major impact on the profitability and efficiency of all types of organisation and CIPS offers corporate solutions packages to improve business profitability. www.cips.org

The intellectual property rights to the UK Manufacturing PMI ^® provided herein are owned by or licensed to IHS Markit. Any unauthorised use, including but not limited to copying, distributing, transmitting or otherwise of any data appearing is not permitted without IHS Markit’s prior consent. IHS Markit shall not have any liability, duty or obligation for or relating to the content or information (“data”) contained herein, any errors, inaccuracies, omissions or delays in the data, or for any actions taken in reliance thereon.  In no event shall IHS Markit be liable for any special, incidental, or consequential damages, arising out of the use of the data. Purchasing Managers' Index ^® and PMI ^® are either registered trade marks of Markit Economics Limited or licensed to Markit Economics Limited. IHS Markit is a registered trademark of IHS Markit Ltd. and/or its affiliates.