Manufacturers scale back output as inflation curbs demand

Irish manufacturing firms have begun to scale back production as demand weakens in the face of rising inflation, one of the strongest signals yet of a slowdown in the wider economy.

The latest AIB Ireland Manufacturing PMI highlighted further declines in output and new orders across the sector. Although the headline index pointed to expansion overall in August, above 50, the bank said this masked further declines in both new orders and output, the two largest components of the index by weight.

New orders fell for the third straight month with firms linking “weaker demand to a reluctance among customers to spend amid rising inflationary pressures and economic uncertainty”.

The subindex for new export orders also fell more quickly than in July while the continued downturn in new business resulted in a third successive monthly drop in output. The rate of decline in August was the fastest since February 2021, AIB said.

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On the upside, manufacturers continued to expand workforces in August despite the downturn in demand. Recruitment was linked to the US market and efforts to boost capacity.

“The AIB Irish Manufacturing PMI survey for August shows a further loss of momentum in the sector as demand falters in the face of rising inflation,” AIB chief economist Oliver Mangan said, noting the PMI declined to 51.1 from 51.8 in July, the fifth consecutive monthly fall.

“While the index remained in expansion territory, it was the lowest reading since October 2020. Much weaker readings, though, have been seen in the rest of Europe for August, with the flash Manufacturing PMI moving down to 49.7 in the euro zone and falling sharply to 46 in the UK,” he said.

“The impact of weakening demand on Irish manufacturing activity is clearly evident in the third consecutive monthly contractions in both output and new orders. The drop in new orders resulted in a further easing in capacity pressures, with backlogs of unfinished work declining for a fourth month running. Weakening demand also saw stocks of finished goods rise at the fastest pace in over three years,” he said.