British factories are forced to cut jobs and reduce investment as demand declines and foreign orders dry up.
Orders from the United States, China, Europe and South America are all in free fall, according to the Purchasing Managers’ Index (PMI), an influential survey of companies from S&P Global.
As a result, production and activity in the manufacturing sector fell more sharply than at any time since the first coronavirus lockdown. Aside from the pandemic, this is the worst performance since the financial crisis.
The UK manufacturing PMI fell to 43 in August from 45.3 in July. Any score below 50 indicates a decline in activity, and thus this indicates a deep crisis in the industry.
Among Europe’s major economies, only German manufacturers are suffering from a deeper crisis than Britain.
High interest rates and persistent inflation have weighed on demand, said Faheen Khan, an economist at industry group Make UK.
“Manufacturers are now acting by cutting jobs and investment as backlogs begin to dry up, leading to an inevitable decline in economic activity soon,” he said.
“Policymakers and interest rate setters will need to be wary of the cost of higher unemployment given that prices remain high for many consumers, and the loss of income will hurt many if we go too far.”
There is a ray of light as manufacturers announced lower prices for their products for the third month in a row, raising hopes that consumers will see some relief from the cost of living crisis.
The Bank of England is expected to raise interest rates again this month, from 5.25% to 5.5%.
But Martin Beck, chief economic adviser to the EY Item Club, said signs of slowing growth and easing inflation would put pressure on officials to hold interest rates steady instead.
He added: “The Monetary Policy Committee’s focus in its next interest rate decision in September is likely to remain on measures of continued inflation in official wage data and services inflation.”
“But growing evidence of economic weakness and deflationary pressures means that the possibility that the MPC will choose to keep interest rates unchanged seems more plausible.”
Meanwhile, European factories are bracing for a deep recession as orders from customers decline, suggesting that the economic crisis, led by Germany, is far from over.
The PMI rose from 42.7 in July, but remains well below the crucial 50 level.
Germany is deepest in contraction territory, with its strong industrial base recording a score of 39.1. The ratio of 45.4 in Italy, 46.0 in France and 46.5 in Spain is also well below 50, indicating that the manufacturing sectors in all four major eurozone economies are contracting.
New orders are falling at one of the fastest paces ever recorded, with domestic and export orders falling sharply, while factories quickly work through backlogs of previous orders.