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The Guardian - UK
The Guardian - UK
Business
Graeme Wearden

UK factories stockpile at record pace; Canada joins global slowdown - as it happened

A female worker at the Wedgewood factory and pottery in Stoke on Trent England.
A female worker at the Wedgewood factory and pottery in Stoke on Trent England. Photograph: Roger Bamber/Alamy Stock Photo/Alamy Stock Photo

Lord BhattacharyyaBusiness. Lord Kumar Bhattacharyya in the International Manufacturing Centre at the University of Warwick.
Lord Kumar Bhattacharyya in the International Manufacturing Centre at the University of Warwick. Photograph: Andrew Fox/The Guardian

Some sad news to end the week. Professor Lord Bhattacharyya, a leading light of British industry for decades, has died aged 78.

Lord Bhattacharyya founded Warwick Manufacturing Group (WMG) at the University of Warwick, credited with encouraging businesses to locate and grow in the Midlands. Over decades, WMG spurred manufacturing, technology, research teaching, and training in the region, and was a benchmark for bridging the gap between academia and business.

Lord Bhattacharyya also played a crucial role in Indian industrial giant Tata buying Coventry car maker Jaguar Land Rover, saving thousands of jobs.

Business Secretary Greg Clark has led the tributes, saying:

“I am deeply saddened by the death of Professor Lord Bhattacharyya. Kumar has been a heroic figure, helping establish in Britain a world-wide reputation for excellence and innovation in advanced manufacturing. Through the WMG, which he founded, and through his extraordinary energy and tenacity Kumar encouraged many firms to locate and expand in Britain. Hundreds of thousands of people in Britain owe their livelihoods to Kumar Bhattacharyya.

“It has been a personal privilege to be able to work so closely with Kumar, who helped inspire our modern Industrial Strategy, and to be his friend. Kumar will be sorely missed by everyone who knew him, and our thoughts are with his wife Bridie, their three daughters Anita, Tina and Malini and their family.”

Here are some more tributes:

Tesla shares tumble

A Tesla showroom in Berlin, Germany.
A Tesla showroom in Berlin, Germany. Photograph: Jens Schlueter/EPA

Over on Wall Street, shares in Tesla have plunged by over 7% after it announced a strategic shift last night.

Elon Musk’s electric car firm is shutting some outlets, which will mean some jobs are lost, as it tries to cu costs by moving sales online.

Crucially for price-conscious potential customers, Tesla is finally offering a version of its Model 3 in the US at a price of $35,000 (£26,400).

But Musk also warned that Tesla is unlikely to make a profit in the current quarter, telling investors that:

“Given that there is a lot happening in Q1, and we are taking a lot of one time charges, and there are a lot of challenges getting cars to China and Europe, we do not expect to be profitable in Q1,.

We do think that profitability in Q2 is likely.”

It’s more fuel for the tussle between those who think Tesla will transform the auto industry, and those who fear for its financial future.

Updated

American factories are suffering from the downturn overseas, says Capital Economics’ Michael Pearce.

Here’s his take on the decline in the US manufacturing PMI last month (which follows weak figures from Japan, China and the eurozone earlier today)

The further drop in the ISM manufacturing index is a clear sign that US manufacturers are getting hit by the broader global industrial downturn. While the shifting domestic policy mix is the main reason we expect economic growth to slow further this year, the weaker global backdrop poses a downside risk to our below-consensus view.

The decline in the ISM index in February to 54.2, from 56.6, was a littler sharper than most anticipated (Consensus 55.5, Capital Economics: 54.0), but is in line with the deterioration seen in most of the regional Fed surveys. Activity in the US manufacturing sector appears to be taking its lead from developments overseas, following the earlier plunge in both the German and Chinese PMIs. With the latter rising last month, there are at least some emerging signs that the global backdrop did not deteriorate much further in February.

Even US can't escape factory slowdown

Ouch! America’s factory sector also weakened last month, according to two rival surveys.

The ISM’s gauge of manufacturing growth, just out, dropped to 54.2 in February form January’s 56.6. That’s the lowest level in two years, and much worst than the 55.5 expected by economists (reminder, any reading over 50 shows growth).

ISM reports that growth in new orders, production and employment all slowed during the month.

Timothy Fiore, chair of the Institute for Supply Management, explains:

“Comments from the panel reflect continued expanding business strength, supported by notable demand and output, although both were softer than the prior month.

Consumption (production and employment) continued to expand but fell a combined 8.9 points from the previous month’s levels.”

The rival manufacturing survey, from IHS Markit, also shows that growth slowed (to the lowest rate since August 2017).

Markit also found that output and new order growth softened last month.

Updated

This is why the rush to stockpile goods in the UK ahead of Brexit is a problem:

In a further example of economic weakness, US consumer spending fell by 0.5% percent in December, the biggest decline in nine years.

That follows a 0.6% gain in November, and indicates that American consumers ended 2018 cautiously -- as trade tensions intensified and the US Federal Government shutdown kicked off.

The Commerce Department also reported that personal income slipped 0.1% in January, the first decline since November 2015.

In 2018 as a whole, Canada’s economy grew by 1.8%, down from 3.0% in 2017.

Household spending and business investment both slowed during the year, as Statistics Canada explains:

The slowdown in 2018 was evidenced in most GDP components, with the exception of exports. The nominal growth of the compensation of employees was also higher in 2018.

Household final consumption expenditure slowed to 2.1% growth following a 3.6% increase in the previous year. Growth in overall business investment slowed to 0.3% following a 2.3% gain in 2017. The slowdown in 2018 reflected a 2.3% decline in housing investment and a 1.7% increase in non-residential construction and machinery and equipment investment. Exports volumes rose at a faster pace, accelerating from 1.1% growth in 2017 to 3.3% in 2018.

Growth in corporate earnings slowed considerably in 2018, as gross operating surplus grew 1.8% in nominal terms, following a 9.1% increase in 2017. Growth in compensation of employees was slightly higher in 2018 (+4.6%) than in 2017 (+4.3%).

With growth so weak, the Bank of Canada may feel unable to raise interest rates anytime soon:

The sharp slowdown in Canadian growth is fuelling concerns that the country could be close to recession....

Canadian growth hits lowest since 2016

The Belvedere Overlook in Mont Royal Park in Montreal, Quebec, Canada.
The Belvedere Overlook in Mont Royal Park in Montreal, Quebec, Canada. Photograph: George Rose/Getty Images

Newsflash: Canada’s economy slowed to near-stagnation in the final three months of 2018.

Canadian GDP only expanded by 0.1% in October-December, new government figures show, down from 0.5% growth in the third quarter of 2018. That’s the weakest performance since 2016, according to Statistics Canada.

In December alone, the economy shrank by 0.1%, another sign that the global economy stumbled at the end of last year.

The slowdown was partly caused by a 2.7% drop in investment spending. Exports of goods and services dropped by 0.1%, which also weighed on growth.

Household spending softened, only rising by 0.2% compared to 0.3% in the previous quarter, while housing investment (home building and refurbishment) declined by 3.9%.

Wall Street is also expected to start March on the front foot:

Here’s our news story on the worrying state of UK manufacturing:

Despite the drumbeat of (mostly) poor manufacturing data this morning, most European stock markets have risen today.

European stock markets
European stock markets Photograph: Refinitiv

Traders seem to be clinging onto hopes that the US-China trade war will be resolved eventually, and banking that central bankers will remain patient and cautious rather than rushing to raise interest rates.

Fawad Razaqzada, market analyst at Forex.com, says the optimism which pushed shares higher in January and February has extended into March.....but it may not last much longer.

Razaqzada writes:

Thursday marked the last day of the month of February, a month which saw the major global equity indices extend their gains for the second consecutive month after they had tumbled at the end of last year. Sentiment improved on the back of positive US-China trade talks and as major central banks have re-iterated the need for interest rates to remain low for longer. For these reasons, we have seen the Shanghai Composite outperform her peers on a year-to-date basis, while ongoing Brexit uncertainty has held back the UK’s FTSE 100.

The key risk now is if no trade deal is achieved at the end of it all, although that looks increasingly unlikely. For now, therefore, momentum appears to be on the upside. But sooner or later, stock market investors will start focusing on something else.

You know the UK retail crisis is serious when it touches the Duchess of Cambridge.

LK Bennett, one of Kate Middleton’s favourite fashion brands, is preparing to fall into administration, putting around 500 jobs at risk.

My colleague Zoe Wood says:

LK Bennett, a brand favoured by the Duchess of Cambridge, has always described itself as bringing “a bit of Bond Street luxury to the high street” but has not been immune to tough high street trading as Britons cut back spending on clothing at a time when the cost of running high street stores has risen sharply.

After being hobbled by Brexit uncertainty for so long, UK exporters will be hoping for some progress on the new trade deals promised by Brexiteers.

But there’s bad news on that front. America is taking a tough line in its negotiations, demanding that Britain gives greater access to US agricultural products.

That could mean the UK drops its current ban on chlorinated chicken or hormone-fed beef, which are both barred from the EU today.

My colleague Lisa O’Carroll explains:

The outline requirements were published by the office of the US trade representative, headed by Robert Lighthizer, as required by Congress. The office said it was seeking “comprehensive market access for US agricultural goods in the UK”.

It was also looking to remove “unwarranted barriers” related to “sanitary and physiosanitary” standards in the farm industry, something that would put it at loggerheads with the UK environment secretary, Michael Gove, who has repeatedly said British food standards will remain the same if not be better than they currently are.

Another example of how life after Brexit will be rather tougher than some campaigners claimed before the 2016 referendum. But hardly a shock either - it’s entirely consistent with president Trump’s world view....

Global manufacturing slowdown: What the experts say

The big picture this morning is that the world’s factories had a poor February.

While UK manufacturing was propped up by stockpiling, the eurozone suffered its worst month in over five years, Japan stumbled, and China couldn’t reverse its recent slump.

Stephen Cooper, Head of Industrial Manufacturing at KPMG UK, says the picture is gloomy across the board:

The rise in stockpiling activity, due to Brexit, has created artificial demand via extra inventory, and has also tied up a great deal of working capital. This is certainly a cause for concern as manufacturers contend with challenging domestic and global factors at an uncertain and fragile time for the global economy.

“There’s also little positivity for the sector globally, as the PMI results for China and Japan also reported a decline. Closer to home, the data for the Eurozone reflects further deterioration, as highlighted by Germany and Italy, this is driven in a large part by geopolitical uncertainty.”

Make UK, which represents British manufacturers, says Brexit is creating a “false boom” at UK factories.

Make UK’s chief economist Seamus Nevin explains:

The reality is that orders are stagnating and future output is expected to decline with optimism clearly hit by the gathering storm clouds.

He’s also worried about the slowdown in the eurozone:

“On the other side of the Channel, Eurozone manufacturing went into its deepest downturn for almost six years as trade war worries, slowing global growth, and the UK’s imminent exit from the EU all hit demand. The slump, which is being led by Europe’s powerhouse Germany as well as France, Spain, and Italy, will worry British businesses. The possibility that the EU, the world’s biggest economy, is heading towards a recession right at the moment the UK leaves doesn’t bode well for our global trade prospects.”

Britain’s stockpiling scramble is a boost to eurozone factories, says economist Sam Tombs of Pantheon.

Earlier this week, Bank of England governor Mark Carney warned MPs there simply aren’t enough warehouses to accommodate all the stockpiling needed for a no-deal Brexit.

But this hasn’t stoppedUK firms cramming raw materials, parts and finished goods into every available nook, cranny and dusty corner, in case supply chains freeze after Brexit.

Lee McDarby, Corporate IP Managing Director at moneycorp, says UK manufacturing is suffering “troubling times”

The weak Pound should be supporting manufacturers to export and yet new export orders have been almost stagnant for the second month in a row.

This signals a slowdown in the global economy, with importers unable or unwilling to buy British goods. Meanwhile the ambitions of manufacturers to sell their products abroad are inhibited by ongoing Brexit uncertainty.

Brexit uncertainty creates 'crawl of the makers'

Here’s Duncan Brock, Group Director at the Chartered Institute of Procurement & Supply, on the challenges facing UK manufacturing:

“The UK manufacturing sector continues to suffer the slings and arrows of outrageous fortune as the harsh realities of Brexit uncertainty, challenges in the global economy and a weak pound affected confidence, jobs and overall activity.

Brock says today’s PMI report shows that firms have been scrambling to stockpile raw materials and finished goods, “to keep their businesses viable in the coming months”.

“The sector’s sickness was also visible in employment levels with the steepest job losses in six years and with business optimism at its lowest levels since 2012, firms are unlikely to start hiring any time soon. The small gram of positivity around the reduction in inflationary pressures on input prices offered little consolation.

“In summary, the march of the makers has turned into a painful crawl where only certainty about the Brexit way forward can ease the sector’s pain.”

UK factories both large and small were forced to cut jobs last month, Markit adds:

Manufacturers cut back on employment for the second consecutive month, with the rate of job losses the steepest since February 2013.

Employee numbers were reduced across the consumer, intermediate and investment goods sectors, and at small-, medium- and large-scale enterprises.

Updated

UK factories stockpile at record rate ahead of Brexit

Newsflash: UK factories are stockpiling at a record rate as they scramble to get ready for Brexit.

Worryingly, business confidence has slumped too, encouraging bosses to cut jobs at the fastest pace since 2013, a blow to workers.

That’s according to Markit’s monthly healthcheck on British manufacturing, just released.

Markit says:

February saw manufacturers continue to implement plans to mitigate potential Brexit-related disruptions. Purchasing activity was scaled-up to stockpile raw materials, leading to a survey-record expansion in input inventories.

The uncertain outlook also impacted on business optimism and employment, with confidence at a series-record low and the rate of job losses hitting a six-year high.

Brexit uncertainty drove firms to stock up on raw materials and components, in case of trade disruption soon:

Pre-production inventories rose to the greatest extent in the series history, after also hitting a record high in January. Almost 70% of the companies offering a reason behind the build-up of stocks attributed it to Brexit.

The UK manufacturing PMI (which measures activity in the sector), dipped to a four-month low of 52.0 in February. That shows slower growth, but is better than the contraction suffered by eurozone factories.

Bloomberg says:

Euro-area factories suffered their biggest drop in orders in almost six years in February amid mounting concern over trade tariffs and Brexit, dealing a blow to those anticipating a speedy rebound in momentum.

US trade war and Brexit blamed for euro ills

Euro area manufacturing is in its deepest downturn for almost six years, warns Chris Williamson, chief business economist at IHS Markit.

And he thinks the situation could get even worse.

“Most worrying is the downward trend in new orders. Orders are falling at a faster rate than output to a degree not seen for seven years, meaning production is likely to be pared back further in coming months unless demand revives.

The new orders to inventory ratio has also fallen to its lowest since 2012, with many companies reporting excess warehouse stocks.

Williamson pins the blame on America’s belligerent trade policies, and uncertainty over Brexit.

“The downturn is being led by Germany and Italy, but Spain has also now fallen into contraction and only modest expansions are being seen in France, Austria and the Netherlands.

“In addition to widespread trade war worries, often linked to US tariffs, and concerns regarding the outlook for the global economy, companies report that heightened political uncertainty, including Brexit, is hitting demand and driving increased risk aversion.”

Eurozone factories shrink for first time since 2013

NEWSFLASH: The eurozone’s factory sector has suffered its first contraction in over five years, dragged down by Germany and Italy.

Data firm Markit reports that manufacturing output in the eurozone slipped into negative territory for the first time since June 2013.

The PMI has plunged to just 49.3, down from 50.5 in January.

Production, output and new orders both declined in February, as the global slowdown buffered the eurozone.

Germany suffered its worst month in over six years, with Italy and Spain also dragging the sector down.

Eurozone PMIs

New orders shrank at the fastest pace since April 2013 - which Markit blame on political uncertainty (ie Brexit), and the US-China trade dispute.

It says:

A challenging international climate, characterised by political and trade uncertainties, meant that export orders fell a fifth successive month and to the greatest degree for over six years.

Markit also warns that backlogs of work declined for a sixth successive month and to the greatest degree since April 2013. Business confidence was among its weakest in six years.

More to follow....

Updated

Dutch factories haven’t escaped the global slowdown either, with growth hitting its lowest level in 32-months in February.

Still, at least they kept expanding....

More gloom! Factory output in Italy has fallen at the fastest rate since 2013, as new orders continue to shrink.

The Italian manufacturing PMI dipped to just 47.7 in February, even worst than January’s 47.8, showing the contraction continued.

Not good for Italy’s hopes of escaping recession soon.

Spain's factories suffer first contraction since 2013

Ouch! Spain’s manufacturing sector has suffered its first contraction in five years.

Spanish factories were hit by their first drop in new orders since July 2016. This helped to drag Spain’s manufacturing PMI down to 49.9 for February, down from 52.4 in January.

This is the first sub-50 point reading since November 2013, ending a five-year run of continuous growth.

Spanish manufacturing PMI
Spanish manufacturing PMI Photograph: Markit

The slowdown in China appears to be a key factor. Markit says:

Panellists commented on a challenging economic environment in February, especially in key export markets. The latest survey showed that new orders declined for the first time since July 2016, undermined in the main by a similar-sized fall in new export work.

The deterioration in foreign orders was the first for nearly six years and reflected weakening demand in neighbouring European countries plus falling sales to China.

Poland’s factories had a very rough February, with growth shrinking at the fastest rate since the financial crisis.

A labourer works inside a steel factory on the outskirts of Jammu, India.
A labourer works inside a steel factory on the outskirts of Jammu, India. Photograph: Mukesh Gupta/REUTERS

We have some good news too, though!

India’s factory sector has posted its strongest growth in 14 months. It’s manufacturing PMI jumped to 54.3, from 53.9 in January, which is the best reading since December 2017.

Firms reported the sharpest rise in factory orders for 28 months, which pushed production and employment levels up.

This will please Delhi, after yesterday’s GDP data showed India’s economic growth has hit its lowest in five quarters.

Russia’s factory sector came close to contracting last month.

The Russian manufacturing PMI dropped to just 50.1 (just above stagnation), from 50.9 in January. That’s a five-month low. Markit blames weaker global demand conditions, and a recent VAT hike.

Economists are hoping that the downturn at China’s factories is bottoming out, after a long slowdown.

As this chart shows, the sector did contract in February - but much less sharply than in January:

China manufacturing PMI
China manufacturing PMI Photograph: IHS Markit

Today’s PMI report shows that Chinese manufacturing exports fell again, but overall output and new orders rose - suggesting a pick-up in domestic demand.

Dr. Zhengsheng Zhong, Director of Macroeconomic Analysis at CEBM Group, explains:

“The subindex for new orders returned to expansionary territory in February after staying in contraction for two months. Despite slipping back into contractionary territory following a rise the month before, the gauge for new export orders hit its second highest level since March 2018. Domestic manufacturing demand improved significantly, and foreign demand was not deteriorating as quickly as last year.

Joe Hayes, economist at IHS Markit, says Japan’s factory slowdown suggests its economy may be weakening -- especially if Tokyo presses on with a planned sales tax hike:

“Sharper reductions in output and demand drove the Japanese manufacturing economy into contraction during the midway point of Q1, compounding reductions already recorded in January. Global trade frictions and weak domestic manufacturing demand pose considerable risks to Japan’s goods producers. As such, firms pared back expectations to near-neutrality. The rebound seen in the official Q4 GDP estimate does not appear to be reflective of underlying economic conditions in Japan.

“With the consumption tax hike set to come into play later this year, weak domestic demand will only heighten fears that the economy could be poised for a downturn. Focus turns towards service sector data, which will need to show signs of resilience in order to offset the manufacturing drag.”

Introduction: Japan's factories suffer biggest slowdown since 2016

A Japanese national flag flutters near a gas flare from a factory at Keihin industrial zone in Kawasaki, south of Tokyo.
A Japanese national flag flutters near a gas flare from a factory at Keihin industrial zone in Kawasaki, south of Tokyo. Photograph: Toru Hanai/Reuters

Good morning, and welcome to our rolling coverage of the world economy, the financial markets, the eurozone and business.

Happy March! Another month has flown by, so the world’s factories are in the spotlight as new data is released showing how they performed in February.

IHS Markit is expected to report this morning that UK manufacturing sector growth slowed last month, despite the rush to stockpile products ahead of Brexit.

Eurozone factories probably had a rougher month, with output probably falling last month as the global slowdown hits Germany exporters, and Italy struggles to escape recession.

These PMI, or purchasing managers index reports, measure activity, output, employment and new orders.

And the word from Asia overnight’s isn’t great. Japan’s manufacturing PMI has shrunk at the fastest pace since May 2016.

Japanese factory bosses reported a sharp downturn in output in February, with new orders shrinking. New exporters continued to decline too, partly due to lower sales to China.

This dragged the Japanese manufacturing PMI into contraction territory, down to 48.9 from 50.3 in January. That’s the weakest reading in 32 months, showing the sector shrank in February (anything below 50 = a contraction).

This suggests that Japan’s manufacturing base has suffered from the escalating trade tensions between the US and China, which remain unresolved (with the US side warning this week that much more work is needed).

Here’s the key points:

  • Headline PMI in contraction territory for first time since August 2016
  • Demand conditions deteriorate at stronger rate
  • Business outlook broadly neutral having fallen for ninth straight month
Japanese PMI
Japanese PMI Photograph: Markit

China’s factories, meanwhile, stagnated. The Chinese manufacturing PMI has come in at 49.9, up from 48.3 in January, signalling a very small contraction. More on that shortly.

The City will also be keen to see the latest UK credit figures; plus we also find out how Canada’s economy fared in the last quarter of 2018.

The agenda

  • 9am GMT: Eurozone manufacturing PMI for February
  • 9.30am GMT: UK manufacturing PMI for February
  • 9.30am GMT: UK mortgage approvals and consumer credit for January
  • 1.30pm GMT: Canadian growth figures for Q4 2018
  • 3pm GMT: US manufacturing PMI for February

Updated

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