By Daniel Hunter

The UK manufacturing sector took a sudden sharp turn for the worse in May. Companies scaled back production and employment as inflows of new business declined at the steepest pace since March 2009, amid rising uncertainty among domestic and overseas clients.

At 45.9 in May, down from 50.2 in April, the seasonally adjusted Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) fell to its lowest level for three years and below the neutral 50.0 mark for the first time since last November. The headline index fell by 4.3 points over the month, the second-steepest fall in its 20-year history.

UK manufacturing production contracted for the first time in six months in May, with declines signalled in the Chemicals & Plastics, Electrical, Mechanical Engineering, Textiles & Clothing and Transport sectors. Companies indicated that lower output reflected weaker global economic conditions, rising competition and a subdued domestic market.

The decline in output may have been sharper had it not been for a marked reduction in backlogs of work, as companies diverted spare capacity towards completing existing contracts. Outstanding business fell at the quickest pace since April 2009.

“The UK manufacturing sector took a sudden sharp turn for the worse in May," Rob Dobson, Senior Economist at Markit and author of the Markit/CIPS Manufacturing PMI.

"The PMI sank to a three- year low as firms cut production in response to levels of new work nosediving. Perhaps of greatest concern is that this month’s drop is not simply linked to the ongoing crisis of the Eurozone, but to increasing weakness of the UK domestic market, with overall order books collapsing at a faster rate than export orders.

"Manufacturers are also struggling to replace orders from Europe with demand from elsewhere, with reports of slower new work inflows from the US and Asia.

“Companies are subsequently becoming much more cost cautious, with manufacturers cutting employment for the first time in five months and reducing stock levels in anticipation of ongoing weak demand in coming months.

“Barring a sharp turnaround in June, manufacturing output could fall by as much as 1% in the second quarter, making the sector a drag on the broader economy and raising the risk of the recession extending into mid-year. However, with price pressures easing further in May, there may be a window of opportunity if the Bank of England wants to give industry a monetary shot in the arm.”

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