Sharpest fall in manufacturing since the global financial crash

British manufacturers recorded one of the largest drops in activity since the global financial crash, latest economic data showed.

Last month manufacturing companies saw falls in output, job losses and a decline in the numbers of new orders – while prices continued to rise, but at a slower rate than before.

Energy costs rose throughout 2022, fuelled by Russia’s invasion of Ukraine and inflation stayed in double digits as the year ended.

It made for the worst month in more than two and a half years and, apart from the early days of the pandemic, one of the worst since the global financial crisis of May 2009, according to the S&P Global/CIPS UK manufacturing purchasing managers index (PMI). The survey serves as a closely watched indicator of economic activity.

It also marked five consecutive months of economic decline and production fell for the sixth consecutive monthly survey.

Similarly, the number of people employed by manufacturers dropped for the third month in a row and was the steepest fall since October 2020.

The PMI ranks manufacturing output on a numerical scale with figures below 50 indicating contraction. A better than expected score of 45.3 was recorded, down from 46.5 in November. Economists had been expected a worse score of 44.7.

The manufacturing sector represents roughly 10% of the British economy.

Brexit and reduced export demand was to blame for some of the difficulties faced by the industry.

“The decline in new business was worryingly steep, as weak domestic demand was accompanied by a further marked drop in new orders from overseas,” S&P director Rob Dobson said.

Demand was lower from China, the US, mainland Europe and Ireland, exporters said, due to weak economic conditions around the world.

Shipping delays, higher costs and other Brexit related issues were raised.

Customs delays increased costs and caused some EU customers to source goods from places outside the UK.

The weakness in Europe is still being exacerbated by the constraints of Brexit, Mr Dobson said, as “higher costs, administrative burdens and shipping delays encourage increasing numbers of clients to shun trade with the UK.”

“The further step down in the manufacturing PMI in December all but confirms the sector now is in recession,” economic research group Pantheon Macroeconomics said.

The group warned that reduced disposable income would weaken domestic demand. This is to worsen in the second quarter of this year, as real incomes are squeezed by the watering down of government support for energy bills and higher unemployment, as businesses are forced to consolidate costs.