The worst may still be ahead.

by Xinhua writer Zhang Yadong

LONDON, March 5 (Xinhua) -- The latest high-frequency economic data show that Britain's manufacturing industry has now been contracting for four consecutive months with signs of further decline.

Data released by S&P on Monday show that in February, Britain's Manufacturing Purchasing Managers' Index (PMI) fell from 48.3 percent in January to 46.9 percent, marking a 14-month low.

Both supply-side and demand-side factors drive the continued contraction.

On the supply side, persistent inflation and significant wage increases have led to cost pressures. According to data from the Office for National Statistics (ONS), in January, Britain's producer price index (PPI) for input costs rose by 0.8 percent month-on-month, mainly due to the rising costs of equipment and food manufacturing materials. This increase was one of the highest recorded over the past year.

Additionally, Britain's employee wages have been continuously rising. A survey by Britain's Food and Drink Federation (FDF) indicates that by September this year, manufacturing cost inflation will reach 2.9 percent.

"Businesses are crying out for cost pressures to be eased so that they can invest, recruit and trade -- driving forward the economic growth we all want to see," said Stuart Morrison, research director at the British Chambers of Commerce (BCC).

The greater impact, however, comes from the demand side. To offset rising costs, Britain's manufacturing firms have passed them onto consumers through higher prices. According to the ONS, the PPI for manufacturing products in January rose by 0.5 percent month-on-month, marking the fastest increase in the past year. Research by the BCC shows that after last autumn's budget announcement, the proportion of businesses planning price increases surged.

Due to persistent inflation, consumers have become increasingly cautious in their spending. The rise in manufactured goods prices has directly hit consumer demand. In January, Britain's retail sales unexpectedly grew by 1.7 percent month-on-month, but food sales primarily drove the growth, while non-food sales declined. In the same month, sales of clothing and footwear fell by 2.7 percent month-on-month, and sales of furniture and home goods dropped by 1.7 percent. Given such demand-side pressures, it is no surprise that the manufacturing output continues to shrink.

At the same time, weak foreign demand also contributes to the continued contraction.

"February PMI data show Britain's manufacturers facing an increasingly difficult trading environment. Weak demand, low client confidence and rising cost pressures are accelerating the downturns in output and new orders," said Rob Dobson, director of Global Market Intelligence at S&P.

In overseas markets, in February, new export business declined at the fastest rate in a year, with order volumes from Brazil, the EU, the Middle East and the United States decreasing. Data from FDF show that due to inflation and trade barriers, as of September 2024, the export volume of Britain's food and drink had dropped by 16.3 percent year-on-year.

The worst may still be ahead. On the one hand, Britain will begin a new fiscal year and implement a new budget in April. Under the budget, its employer's National Insurance contribution rate and the minimum wage for employees will both increase, further exacerbating existing cost pressures. The Bank of England forecasts that by the third quarter of this year, Britain's inflation will reach 3.7 percent, which will place significant pressure on manufacturing input costs.

On the other hand, the threat of tariffs from the United States will impact Britain's exports. The FDF notes that the United States is Britain's third-largest food and beverage export partner and has maintained a trade surplus with Britain for the past decade.

The difficulties facing Britain's manufacturing industry have also affected the labor market. The primary reasons for businesses' rising operating costs are the government's increases in the minimum wage and the employer's National Insurance contribution rate.

To mitigate these impacts, companies have been laying off workers. Over the past six months, the country has seen five months of declines in staffing levels. Data from S&P show that in February, Britain's companies laid off workers at the fastest rate since the COVID-19 outbreak.

Industry organizations are calling on the government to take active measures to ease the burden on businesses. Alpesh Paleja, deputy chief economist at the Confederation of British Industry, said, "Private sector businesses are looking to the government to take steps to restore confidence and encourage investment -- whether through long-awaited reforms to the apprenticeship levy, increased incentives for occupational health, or changes to business rates."

"Further ahead, companies want to see an industrial strategy that offers the stability and certainty needed to drive innovation and investment, as well as fostering sustainable economic growth that benefits both businesses and households," he added.