UK manufacturing recovery continues

Published:  14 October, 2010

Britain ’s manufacturers are continuing to report buoyant trading conditions on the back of rising demand in overseas markets, pointing to good prospects for growth in 2010 according to a major survey published by EEF, the manufacturers’ organisation and BDO LLP. The third quarter EEF/BDO ‘Manufacturing Outlook’ report reveals that recovery, which began at the end of last year, has been sustained with output and orders balances reaching record levels for the second quarter in succession. This performance continues to be driven by the strength of overseas markets, with new analysis published by EEF showing a close relationship between exposure to export markets and company performance. Greater confidence across the sector is also continuing to translate into some recruitment, albeit this is being driven by temporary or agency working which will give employers flexibility should demand begin to slow. Uncertainty about future demand had been dampening investment plans, but a number of sectors are now planning to increase in investment. The positive investment intentions posted this quarter breaks the pattern of previous recessions by recovering at an earlier stage in the cycle. However, the short-term optimism highlighted by EEF’s survey is shaded with a degree of caution about the risks to growth in 2011, as fiscal consolidation gets underway in the UK and others follow suit. Commenting, EEF chief economist, Ms Lee Hopley, said: “Manufacturers have continued to reap the rewards of growth in overseas markets with the upswing being felt across all sectors and regions. Not only has this continued to translate into better employment prospects but the recovery in investment has begun much earlier in the cycle than after previous recessions. “However, we have to maintain perspective that the recovery is coming from a very low base and the risks to the economy in the medium term haven’t gone away. The rebound in exports and modest improvement in investment will need to become much more firmly entrenched if we are to see a much-needed rebalancing of the economy.” Tom Lawton, head of manufacturing, BDO LLP, commented: "The sector has shown seen a significant upturn since the dark days of the recession and this quarter's results show continued growth in output and orders and more expected for the next quarter, mostly driven by the restocking across most sectors of industry and exports. “This quarter results show more optimism around two key indicators which have been lagging behind the general good news of the sector in recent surveys, being employment and investment. This is excellent news but much more will be needed to enable manufacturing to compete in the space where we have a competitive advantage - innovation, research and development, excellent customer service and fast response to emerging trends." Over the last three months, output and new order balances were +33% and +35% respectively, both record levels since the survey began in 1995 which suggests growth in manufacturing output should at least continue into the next quarter. This growth has been driven largely by export markets (+30%), where Europe in particular turned out to be stronger than expected. While the domestic order balance weakened slightly, the balance of +20% is still above its long term average. Furthermore, growth continued to be broad based across all regions and sectors. The survey was also notable for two other factors. Firstly, the balance of companies recruiting almost doubled in the last three months to +17%, the strongest in the survey’s history. Secondly, the investment balance turned positive to +7% for the first time since 2008 q2. Compared with previous recessions, where investment balances have tended to lag behind increases in output by over a year, this is a somewhat faster recovery in capital expenditure intentions and signals that companies are becoming more confident to begin investing in plant and machinery. Looking forward, expectations about future prospects remain positive, with a balance of 27% of companies expecting output to increase in the next three months, and 22% expecting orders to expand. Both of these balances are higher than the previous quarter’s figures suggesting there is confidence that the recovery will continue into the next quarter at least. EEF also published its latest forecasts for the UK economy and manufacturing. These show the economy growing by 1.5% and 2.1% in 2010 and 2011 respectively while manufacturing will grow by 3.7% in 2010 before easing back slightly to 3.2% in 2011.

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