Britain’s factories started the year on a weaker footing after 17 consecutive months of contraction, as higher borrowing costs and a slump in demand took their toll.
Factory output fell by more than expected in December after a drop in orders from domestic and export clients, according to the latest snapshot from S&P Global and the Chartered Institute of Procurement and Supply.
In a survey of about 650 manufacturers, which is closely watched by the Bank of England for early warning signs from the economy, company bosses said a worsening economic backdrop, clients delaying orders and poor weather conditions had contributed to the latest decline.
The reading on the S&P Global/Cips manufacturing purchasing managers index (PMI) weakened to 46.2 in December, ending a run of three months of improvement and down from a seven-month high of 47.2 in November. The gauge of business activity remained below the 50 mark, which separates growth from contraction, for the 17th consecutive month.
It comes as manufacturers come under mounting pressure from higher borrowing costs after 14 consecutive increases in the Bank of England base rate since December 2021. Demand for manufactured goods has also fallen back amid a slowdown in international trade and as households grapple with the cost of living crisis.
Rob Dobson, the director at S&P Global Market Intelligence, said demand in the manufacturing sector remained “frosty” at the end of 2023. “The downturn has hit manufacturers’ confidence, which dipped to its lowest level in a year, and encouraged renewed cost caution with further cuts to stock levels, purchasing and employment.
“With concerns about high interest rates and the cost of living crisis hurting demand, the outlook for manufacturers in the months ahead remains decidedly gloomy.”
Lower demand from key trading partners in the US, mainland China, mainland Europe and Canada led to a drop in new export business in December, while job losses were recorded for a 15th consecutive month as businesses pushed to make cost savings.
Business optimism among manufacturers dipped to a 12-month low, reflecting a faltering economic outlook and higher borrowing costs. However, S&P Global and CIPs said companies still expected average production volumes to increase over the coming year.
City investors are betting the Bank will be forced to launch a sharp round of interest rate cuts this year as inflation continues to fall back from the highest level in decades and the economy struggles for growth momentum. Financial markets are pricing in as many as six interest rate cuts from the current level of 5.25% to about 3.75% by December.
Highlighting the pressure on companies, the Institute of Directors said its economic confidence index, which measures business leader optimism and prospects for the UK economy, fell back to -28 in December from -21 in November.
Roger Barker, the director of policy at the IoD, said the Bank cutting interest rates could help to “kickstart business confidence” over the coming months. “With inflationary pressures abating, business is in dire need of a boost if it is to help drive meaningful economic growth in 2024.”
Separate figures from the financial services sector compiled by the accountancy business KPMG showed a recovery in confidence among companies despite continued worries over high inflation and interest rates.
According to a survey of senior executives in banking, insurance, and asset management, a majority of 87% said they were confident about overall business growth in the first quarter. However, more than half said persistent inflationary pressures would still pose the biggest challenge for their business, followed by 46% citing higher borrowing costs as the most pressing challenge.
Karim Haji, the global and UK head of financial services at KPMG, said: “It’s great to see financial services leaders go into the new year feeling confident despite ongoing economic turbulence, which is set to continue to challenge the sector in the first quarter.”