The UK manufacturing sector last month saw the sharpest shrinkage in almost a year, as companies continued to cut costs due to rising costs an uncertain global economic backdrop and UK government policies.
December’s PMI survey of the manufacturing sector by S&P Global showed a decline to 47.0, the worst in 11 months, from 48.0 the month before.
As well as being further below the 50 mark that the purchasing managers’ index (PMI) uses to indicate the separation of growth from contraction, the PMI reading was also worse than the 47.3 that the market expected.
The downturn in the UK manufacturing sector deepened at the end of 2024, says S&P, with contraction worsening in output, new orders and employment.
Reasons given by manfacturing firms for their lower responses were destocking from clients, subdued market confidence and operational restructuring they were carrying out in preparation for legislative changes, all of which is leading to many companies continuing to cut costs.
“Global market conditions are also providing a growing headwind, with export sales hit by lower demand from Europe, Asia and the U,” said Rob Dobson at S&P Global Market Intelligence.
“Business sentiment is now at its lowest for two years, as the new government’s rhetoric and announced policy changes dampen confidence and raise costs at UK factories and their clients alike.”
He said this was “sending a winter chill through the labour market”, with the sharpest cuts to staffing levels since February, with some companies acting to restructure operations in advance of the rises in employer National Insurance and minimum wage levels in 2025.
Price gauges also edged higher, reflecting rising transportation, labour and material costs.
The PMI reading is consistent with official UK manufacturing output falling by 1.1% on a three-month-on-three-month basis, said economist Elliott Jordan-Doak at Pantheon Macroeconomics.
He also noted that the forward-looking elements of the survey continued to fall in December, pointing to a weak growth outlook for the sector.
However, he notes that input and output price balances were both revised downwards from the ‘flash’ release figures mid-month, which was one bright spot.
But despite the manufacturing weakness in December, he thinks that it will “steadily improve” in 2025.
“Businesses have been rocked by domestic policy changes in the form of NICs hikes, and external shocks in the form of the threat of a global trade war,” said Jordan-Doak.
“But, the Budgetary plans are for more spending than taxation, which will mechanically lift the PMI. What’s more the focus on investment in the Budget should help the manufacturing sector.”
The Bank of England is also expected by the market to cut rates twice in 2025, with some economists predicting three cuts, which will reduce borrowing costs for firms and “should boost sentiment”, he added.