UK factory slump deepens ahead of Bank of England interest rates rise

UK factory output and new orders fell in July as recession fears grow. Photo: Reuters/Phil Noble
UK factory output and new orders fell in July as recession fears grow. Photo: Reuters/Phil Noble

UK's factory output and new orders shrank at the fastest rate since May 2020 as the cost of living crisis, inflation, weaker domestic demand, and "lingering" post-Brexit issues weighed.

New figures from the S&P Global/CIPS show manufacturing purchasing managers' index (PMI) fell to 52.1 last month from 52.8 in June, and slightly below the preliminary "flash" July reading of 52.2.

However, manufacturers' input and output prices rose at the slowest pace in more than a year, ahead of the Bank of England's (BoE) rates decision on Thursday.

The latest gauge of output and new orders adds to the wider market gloom as the BoE is expected to lifts its key rate to the highest in 27 years after Bank governor Andrew Bailey warned prices could peak above 11% this year, well above the 2% target.

Threadneedle Street is expected to raise rates by 50 basis points rather than 25 basis points on 4 August as it tries to prevent the recent surge in inflation to 9.4% from becoming embedded in the economy.

Chart: S&P Global
Chart: S&P Global

Rob Dobson, director at S&P Global Market Intelligence, said: "With the Bank of England implementing further interest rate hikes to combat inflation, the outlook is beset with downside risks.

"Rising market uncertainty, the cost of living crisis, war in Ukraine, ongoing supply issues and inflationary pressures are all hitting demand for goods at the same time, while lingering post-Brexit issues and the darkening global economic backdrop are hampering exports."

Read more: UK business confidence continues to fall amid soaring inflation and cost of living crisis

A separate Lloyds Bank (LLOY.L) survey published on Friday also showed manufacturers had been hit hard by rising inflation as cost of living drove down business sentiment. And economists have warned that businesses will "need to be wary of a far more difficult period" as the UK economy slows.

Fhaheen Khan, senior economist at Make UK, said: "Manufacturing activity is revealing the early symptoms of a decline as the backlog of orders clear, and businesses fail to secure new work.

"Rampant inflation has been the main contributor to this as passing costs down the chain leads to more consumers reducing their appetite and willingness to spend."

Read more: UK firms most worried about soaring costs and energy bills

It comes as factories across Europe struggle with rising costs and slowing demand. Eurozone's manufacturing sector fell deeper into contraction territory in July, as PMI data signalled the sharpest decline in output since May 2020.

In Germany, Europe's largest economy, the manufacturing sector also contracted last month, for the first time in two years as producers fear gas shortages. Manufacturing PMI, which covers roughly a fifth of Germany’s economy, fell to 49.3 from 52 in June.

Phil Smith, economics associate director at S&P Global Market Intelligence, said: "The potential for a shortage in gas supplies has German manufacturers seriously worried about the outlook for production in the coming year.

"Goods producers’ expectations turned negative back in March, and have deteriorated in almost every month since then as downside risks to the sector’s outlook continue to build."

French manufacturing output fell in July at the fastest rate since the first COVID wave in 2020, coming in at in at 49.5, down from 51.4 in June. Goods production fell at the sharpest rate since April 2013 as high inflation squeezed demand and persistent supply issues constrained output.

Watch: What is a recession and how do we spot one?