By Daniel Hunter

The UK manufacturing sector contracted for the second successive month in March, as companies scaled back production in response to lacklustre demand from both domestic and overseas markets.

The seasonally adjusted Markit/CIPS Purchasing Manager’s Index (PMI) edged higher to 48.3 in March, an improvement on February’s four-month low of 47.9 but insufficient to raise the headline index back above the neutral mark of 50.0. The average reading over Q1 2013 as a whole (49.0) was slightly below that for the final quarter of last year (49.2).

UK manufacturers reported further declines in both production and new orders during the latest survey period. Output fell at the steepest pace since last October, whereas the rate of contraction in new business eased marginally since the prior month. Lower output was linked to tough market conditions and subdued client confidence. There were also a number of reports mentioning stock management initiatives and ongoing bad weather conditions.

Weakness was mainly centred on the intermediate goods sector, where output and new orders both contracted at accelerated rates. Production also fell in the investment goods sector, and stagnated at consumer goods producers. However, both sectors saw minor improvements in new order inflows.
Incoming new export orders contracted for the fifteenth month running in March. There were reports of weak demand from Europe and strong competition in the US and South Asia markets.

Job losses were reported for the eighth month running in March, reflecting company restructuring, redundancies and natural wastage. However, the extent of the reduction was moderate and slightly less marked than in February. Job cuts were mainly focused on larger manufacturers, as smaller firms reported little change to payroll numbers.

March data signalled a further increase in overall input costs, amid reports of higher prices for electricity, food products, gas and oil. There were also some reports of increased prices for imported raw materials and semi-finished products, in some cases linked to the ongoing weakness of sterling.

Part of the increase in costs was passed on to clients in the form of higher selling prices. Charges rose at a solid pace that was broadly in line with the long-run series average. There nonetheless remained some reports of strong competition and weak market conditions restricting selling price increases.

“March PMI data indicate that the UK manufacturing sector contracted again during the opening quarter of 2013, to remain a drag on the broader economy. These weak numbers may be sufficient to tip the balance and convince more members of the MPC to consider additional QE at their meeting next week," Rob Dobson, Senior Economist at survey compilers Markit, said.

“The onus is now on the far larger service sector to prevent the UK from slipping into a triple-dip recession. The ongoing weakness of manufacturing and the hard to estimate impact of bad weather on first quarter growth suggest that this is still touch- and-go and that any expansion will be disappointing nonetheless.

“Manufacturers are still feeling the impact of subdued demand in domestic and export markets, as consumers and businesses rein in spending and the Eurozone remains in what seems to be a perpetual cycle of crisis. Cost-caution is also leading to manufacturing job losses, destocking of inventories and a reluctance to invest, all of which will exert a drag on the broader economy in coming months.”

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