UK factories face tough 2023 after December weakness

British manufacturers are starting 2023 on the back foot, after they reported one of their sharpest falls in activity since the 2008-09 recession last month, reflecting a sharp fall in new orders and ongoing job cuts.

The S&P Global/CIPS UK manufacturing Purchasing Managers' Index (PMI) sank to 45.3 in December from 46.5 in November, its lowest since May 2009 apart from two months at the start of the COVID-19 pandemic in 2020.

Tuesday's reading was stronger than an initial estimate of 44.7 released last month, but well below the 47.8 reported in the equivalent euro zone survey on Monday.

"Output contracted at one of the quickest rates during the past 14 years, as new order inflows weakened," S&P director Rob Dobson said. "The decline in new business was worryingly steep, as weak domestic demand was accompanied by a further marked drop in new orders from overseas."

The figures broadly chime with a gloomy outlook issued last month by trade association Make UK, who forecast output in the sector would fall 3.2% in 2023. The latest official data shows factory output in October was 4.6% lower than a year before.

"These results are the latest in a series of weak indicators ... which suggest that GDP likely fell again in Q4 2022. Furthermore, with the squeeze on household and corporate finances set to continue, the situation is unlikely to improve in the near future," said Martin Beck, chief economic advisor to the EY ITEM Club.

Government budget forecasters predicted in November that the British economy as a whole would shrink 1.4% this year as businesses and households continue to face high inflation.

Separately, chief financial officers at major British companies reckon that higher interest rates mean now is the worst time for companies to borrow since the financial crisis 14 years ago, according to a quarterly survey from Deloitte.

Manufacturers in the monthly PMI survey were slightly more upbeat about the year ahead. Expectations of future output rose to a five-month high as supply chain difficulties became less acute and inflation pressures fell to the lowest since late 2020.

But factories still cut jobs by the most since October 2020, as orders fell from both domestic customers and clients in China, the United States, mainland Europe and Ireland.

"The main driver of lost export contracts was weak global economic conditions, while there was also mention of Brexit-related issues, such as shipping delays and higher costs, leading some EU clients to source products elsewhere," survey compiler S&P Global said.