Manufacturing gains momentum as recovery begins

Published:  09 December, 2016

Britain’s manufacturers saw the delayed recovery finally arrive in the final quarter of 2016 with a much improved boost to output and orders, according to a major survey recently released  by EEF, the manufacturers’ organisation and accountants and business advisory firm BDO LLP.

Publishing the Q4 Manufacturing Outlook survey and revised economic forecasts, EEF pointed to early signs that the sector has left behind the negative effects of the low oil price and concerns about global growth and is now seeing opportunities from a resilient UK market and brightening export prospects.

The improved picture is mainly being driven by a better UK market, though the much expected boost from a weaker pound is expected to come to fruition in the next quarter. The survey also showed the majority of manufacturing sectors and regions reported more positive output balances in the past three months compared with the previous quarter.

As a result, better conditions are also spurring a rebound in recruitment intentions, as well as a turnaround in investment to fulfil customer requirements and secure productivity gains.

However, EEF stressed that the picture is one of the sector regaining ground after a sluggish eighteen months. While key indicators moving back into the black is a positive development, risks remain on the horizon, some Brexit related and others potentially stemming from elsewhere in the world. As a result, despite the improvement in conditions, EEF is still forecasting that manufacturing will contract in 2017.

Furthermore, EEF also pointed to inflationary pressures building and significant price rises in the pipeline, a factor likely to weigh down on domestic activity in the year ahead. Profit margins are also under considerable pressure and are likely to be squeezed further in 2017.

Commenting, EEF chief economist, Ms Lee Hopley said:

“This is the most upbeat reading on the state of manufacturing we’ve seen for some eighteen months and signals the start of brightening conditions, which had been briefly knocked off course following the referendum. This anticipated turnaround can be attributed to a range of factors including the resilience, thus far, of the UK economy but also the strengthening of demand in a number of major markets. Critically, this should spur some new investment and recruitment activity to fulfil new customer demands.

“While confidence is back on the up, manufacturers are still aware of growth challenges in the near term.  Brexit aside, global growth is not yet on the firmest of footings and, with volatile exchange rates also in the mix, UK manufacturers will need to continue to be nimble in their responses to emerging challenges and opportunities in the months ahead.”

Tom Lawton, partner and head, BDO Manufacturing, said:

“Despite uncertainty at home and abroad, UK manufacturing is proving to be resilient. It is promising to see that five months on from the referendum, UK manufacturers are reporting increases in both output and orders. The depreciation of Sterling is helping manufacturers export more and they are seeing a steady increase in appetite from the EU and US. However, this is putting additional pressure on the cost of raw materials being imported and therefore profit margins for manufacturers, which will ultimately push up prices.

“Brexit means a period of challenge and vulnerability for the sector and businesses need stability and certainty in government policy if they are to continue to commit to the investment that the country needs to grow.” 

According to the survey output picked up significantly with the balance of companies reporting growth increasing from -7% in Q3 to +13%, the first time the overall balance has been positive since 2015Q2. This trend is expected to continue into the next quarter with a balance of +16% of companies expecting to increase output.

This improvement was widespread with basic metals and metal products seeing significant, more immediate gains from a weaker pound whilst the continued strong performance of the motor vehicles sector has also helped cement these gains. Electronics and Electrical equipment, two of the stronger performers this year, also continued on a solid growth path driven by better demand in Asia and the US. The big outlier, however, was food and drink which is facing the twin challenge of significantly higher input costs and pricing power from supermarkets.

The orders pipeline also entered positive territory for the first time in five quarters, improving to +13% from -4% in Q3. This was mainly down to better conditions in the UK market, though prospects in export markets are expected to pick up significantly in the first quarter of 2017, consistent with EEF’s view that the benefits from a weaker pound would accrue next year. This reflects the expectation of a simultaneous ongoing improvement in demand from all key export markets, a view which is universal across all sectors and business sizes.

The survey shows that better conditions have prompted manufacturers to increase capacity, taking on more people and increasing investment. The employment balance improved to +9%, with a similar improvement expected next quarter, whilst investment intentions also turned positive, jumping to +6% from -10%, the first increase since 2015Q3. This backs up EEF’s 2016 Investment Monitor which showed that despite the current uncertainty manufacturers plan to increase investment to meet current capacity needs.

In response to the improved conditions, EEF has revised its forecasts upwards for 2017, but not enough to avoid the prospect of a small contraction for the sector. Manufacturing is expected to contract by -0.2% (-0.7% previously) whilst GDP is forecast to grow by 1.3% (0.8% previously).

The survey was conducted between 2 and 23 November with 388 companies responding.

 

 

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