Recovery in the euro zone, the UK’s largest export market, has lost momentum as manufacturers saw conditions weaken last month and consumer sentiment remain mixed due to weak labour markets and depressed stock exchanges.
The Reuters Eurozone Purchasing Managers Index for manufacturing fell for the third successive month in September, to a seven-year low. It fell to 48.9, where a reading below 50 indicates a deterioration on the previous month, by lower output and orders, and a gathering pace of job losses.
Germany was the dominant source of weakness – its manufacturing sector hit by falling domestic demand and the uncertain improvement in the US economy and in other major global markets.
Interest rate decision
In Britain, the decision by the Bank of England to leave interest rates unchanged this month disappointed many manufacturers. They had hoped for a cut to help revive stagnant output and counter falling demand from abroad. However, the Bank had to balance the gloomy global outlook with the continued buoyancy of the domestic consumer and housing market.
Industrial output in the three months to the end of August was down 1.4% compared with the previous three-month period and 4.2% lower than at the same time last year. Official figures show that factory output was even more depressed, with a year-on-year drop of 4.9% in the latest three months. In August output was unchanged from July, with most of the strength coming from a 17.8% jump in motor vehicle production, as 10 of the 13 manufacturing sectors fell. Excluding automotive products, factory output dropped 0.7% on the month.
Marginal manufacturing growth
Survey evidence for September indicates only marginal growth in manufacturing, and orders were won at the cost of profit margins. However, inflationary pressures on input costs are described as “negligible”. The latest official figures reveal a small rise in factory gate prices during September. Manufacturers’ prices for wood and wood products rose 0.2% on the month and by 0.5% over the year, while input prices rose by 0.1% during the month and by 1.8% compared with September 2001.
Retail prices of furniture rose 2.1% in the year to September, compared with 1.7% for High street inflation overall, while DIY product prices fell by 0.8%.
Tightening demand for construction materials led to a further increase in the sector’s costs overall during September, according to the latest survey by the Chartered Institute of Purchasing and Supply. The increase reflects supply shortfalls, in the 44th consecutive month of expanding activity. The strongest growth in activity was in housing, where it rose at the fastest rate since May. Slower growth was reported in commercial building and civil engineering projects.
Housebuilding growth
Official figures indicate that the total value of new housebuilding and orders placed with contractors in the three months to August increased by 8% compared with the previous three-month period. Orders for new commercial projects rose by a similar volume, but there was a 4% drop in orders for industrial premises.
At present rates of housebuilding, demand will continue to outstrip supply and put additional pressure on house prices. Mortgage lender Halifax reported a 4.3% rise last month, and revised upwards its annual inflation forecast to 24%.
Meanwhile, consumer confidence firmed up slightly in September, and the CBI says that there was a modest improvement in high street business. Nonetheless underlying retail sales growth remained weak and volumes were well below those reported in the first half of the year. Outlets selling housing-related goods, including furniture – one of the timber industry’s key markets – went against the trend to record another month of strong year-on-year growth.
