Operating conditions in the manufacturing sector deteriorated for the second consecutive month in December, the latest AIB Ireland manufacturing purchasing managers' index (PMI) shows.

Contractions in new and outstanding work accelerated, while output fell more slowly and stocks of both inputs and finished goods built up. Pressure on supply chains also eased further, leading to the slowest round of input inflation since February 2021.

The PMI registered 48.7 in December, unchanged from November, indicating a second successive month of deterioration in operating conditions in the goods-producing sector.

Any figure below 50.0 indicates an overall decline in the sector, and the stabilisation in the headline figure last month followed a sequence of decrease in seven of the previous eight months.

"The AIB Irish Manufacturing PMI remained in contraction territory in December for the second month running, with the headline index unchanged from November at 48.7," said Oliver Mangan, chief economist with AIB.

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"This points to a continued deterioration in business conditions in the sector, with new orders in particular falling sharply.

"The weak PMI reading of 48.7 is broadly into line with the trend seen elsewhere, though the pace of contraction is not as marked in Ireland - the flash manufacturing PMIs stood at 46.2, 47.8 and 44.7 in the US, Eurozone and UK in December."

The rate of decline measured in the final two months of 2022 was not as severe as the lockdown-related downturn in March to May 2020, but slightly stronger than that registered on average during the second half of 2019.

An accelerated decline in new orders and a continued lengthening in supplier lead times weighed most heavily on the PMI, but were partially offset by a slower reduction in output, a faster rise in stocks of purchases and a renewed increase in employment.

New orders fell for the seventh successive month last month, highlighting a sustained downturn in demand. Moreover, the rate of decline increased to its fastest level since May 2020, excluding the spring lockdown of 2020.

New exports orders fell at the slowest rate in the current seven-month sequence of decline.

"Orders have been in decline since June reflecting weakening demand," said Mangan. "This has resulted in the downturn in manufacturing activity seen in the closing two months of the year.

"As noted, there rate of decline in new orders was quite marked in December, though much less so for new export orders. Falling orders led to another drop in output, the sixth decline in the past seven months."

Faced with declining new orders, manufacturers continued to clear backlogs of orders, with outstanding business falling for the eighth month running, and at the fastest rate since June 2020. As a result, stocks of finished goods rose for sixth successive month.

However, production declined for the sixth time in seven months, although the accelerated clearance of backlogs meant that the rate of contraction eased and was not as fast as the drop in new work.

"Stocks of finished goods rose for the sixth month running," Mangan continued. "Stocks of inputs also continued to rise, while order backlogs fell for an eighth consecutive month as firms cleared outstanding work."

After reducing employment for the first time in over two years in November, Irish manufacturers expanded the workforce in November. Recruitment was linked to investing in new capacity for 2023, with firms' expectations for their 12-month outlook picking up.

The overall rate of job creation was only marginal and expectations for production remained below the long-run survey average, reflecting concerns over the economic outlook, the energy crisis and high inflation.

Purchasing was scaled back in December as demand weakened further, and firms reported excess stocks, while input inventories rose for the 21st consecutive month, and at one of the fastest rates on record.

"In terms of the 12-month outlook, sentiment also improved, though it remains at a historically subdued level," Mangan said. "There was a further easing of supply chain pressures, with only 12% of firms reporting longer suppliers’ delivery times.

"Meantime, the rate of input price inflation while still elevated, continued to ease, hitting a 22-month low. Output price inflation also remained high, accelerating in December, though still at the second lowest level in the past 19 months."

Weaker demand for inputs translated into a further easing of pressure on supply chains, where lead times lengthened at the smallest extent since February 2020.

Input price inflation continued to run above the long-run survey average in December, with 38% of firms reporting increased average input prices, especially for energy.

That said, the rate of inflation eased for the fifth month running to a 22-month
low. Output price inflation remained historically elevated and accelerated since November.

(Pic: Getty Images)