UK Manufacturers Laying off Workers, Building up Stockpiles

Manufacturing PMI

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The manufacturing sector in the UK remained in expansionary territory in February according to the most up-to-date data on the sector, however digging below the headlines the data raises concerns the sector is growing increasingly fragile in the countdown to the March 29 Brexit day.

The IHS Markit Manufacturing PMI for February read at 52, in-line with analyst expectations but below the previous month's 52.6, suggesting a slowdown in activity month-to-month.

A reading above 50 suggests expansion. The details of the survey suggest a sector that is not entirely in rude health, instead it appears there is a great deal of stockpiling driving expansion with businesses keeping one eye on Brexit day on March 29.

"Pre-production inventories rose to the greatest extent in the series history," report IHS Markit. "Preparations to mitigate Brexit uncertainty were most visible in the trend in stocks of purchases."

Almost 70% of the companies offering a reason behind the build-up of stocks attributed it to Brexit.

"We are sceptical that this stock-building activity will do much to boost overall economic growth. Warehousing availability in the UK is relatively scarce, having been utilised by the rapid growth in online shopping over recent years," says James Smith, Developed Markets Economist with ING Bank.

Looking beyond the headlines on inventory stockpiling, IHS Markit report manufacturers cut back on employment for the second consecutive month, with the rate of job losses the steepest since February 2013.

"Employee numbers were reduced across the consumer, intermediate and investment goods sectors, and at small-, medium- and large-scale enterprises," say IHS Markit.

"Businesses are now also reporting job cuts and hiring freezes," says Fabrice Montagné with Barclays. "A turnaround in the labour market would be a critical development leading to possibly radical changes in consumer spending even though this risk is alleviated by somewhat better prospects regarding the ratification of the EU withdrawal agreement."

A worsening employment outlook was echoed in the February GfK consumer confidence and European commission economic confidence survey. January service PMIs also reported a contraction in employment and the February survey to be released next week will have to be watched closely.

"The more worrying development in February was the intensification of manufacturing job cuts. Companies not only reported hiring difficulties as in previous months due to the overall tight labour market, but are now also reporting redundancies and hiring freezes," says Montagné.

Concerning the near-term outlook, ING's Smith says the challenges facing the manufacturing sector are likely to grow over coming weeks.

"We think there’s an increased risk that manufacturers find their day-to-day operations affected by the threat of ‘no deal’. For instance, it may become increasingly tricky/costly to arrange cross-border shipments," says Smith.

This week has however seen the risks of a 'no deal' Brexit reduce substantially as Prime Minister Theresa May offered parliament the chance to vote for an extension should her deal be rejected on, or before the March 12 deadline.

We believe this might provide some positive Brexit-related sentiment into the sector and we would not be surprised to see some stabilisation in the sector.