Business optimism rises as factories reopen

robots welding in factory

Britain’s manufacturing sector stabilised this month after collapsing at its fastest pace on record during the lockdown, according to a closely watched survey.

Although output is still far below its pre-crisis levels, activity is picking up and the sector is starting to recover. The IHS Markit/Cips flash composite purchasing managers’ index (PMI) for the manufacturing sector jumped to 50.1 in June. This was in line with an earlier flash estimate.

The index came in above the 50 mark that separates growth from contraction, indicating that the sector is expanding. It marks a substantial turnaround from April, when factories shut their doors in response to lockdown laws and the index plummeted to a record low 32.6.

Rob Dobson, director at IHS Markit, said: “June completed a marked turnaround in momentum in UK manufacturing, as the sector switched from April’s record contraction back to stabilisation in the space of two months. Output edged higher and domestic demand firmed as lockdown restrictions loosened, factories restarted and staff returned to work. Business optimism also recovered to a 21-month high. The planned loosening in Covid-19 restrictions on the 4th July should aid further gains in coming months.”

Manufacturing production and business confidence both rebounded in June but the outlook for the sector is still uncertain. Employment levels fell for the fifth consecutive month, although the rate of decline has eased since April.

Economists warned that job losses would rise faster when the government’s job retention scheme expires in the autumn. “Economic conditions will need to improve markedly across the UK, or some support retained, if the labour market downturn is to avoid becoming more entrenched through the remainder of the year,” the report said.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: “The level of the employment balance in June — the fifth consecutive reading below 50 — hardly suggests that manufacturers are gearing up for a V-shaped recovery. What’s more, Brexit uncertainty likely will build over the coming months, as the December 2020 deadline for a trade deal with the EU nears without material progress in talks, hitting export demand and investment. Accordingly, it remains highly unlikely that manufacturing output will recover to its pre-Covid level on a sustained basis within the next year.”

The outlook for the services sector is even weaker. A flash PMI reading for June came in at 47, suggesting that output is still shrinking. Official figures indicate that GDP shrank by about a fifth in April and that it is now about a quarter of the size it was at its peak in February. According to the Bank of England’s May forecasts, output is likely to have fallen by 25 per cent over the quarter as a whole and the economy is unlikely to recover until 2022.