Signs of stability as manufacturing’s slide starts to bottom out

The first quarterly EEF Manufacturing Outlook survey this year shows signs that the sector’s slide into negative territory may be coming to an end.

The latest quarterly EEF Manufacturing Outlook survey – the first in 2016 – suggests that the sector’s slide into negative territory, which defined much of its performance last year, may be bottoming out.

After ending 2015 on a gloomy note, manufacturers report some welcome rays of light this quarter. Output has edged up after hitting its weakest point in six years in the final quarter of 2015.

It is still firmly rooted in negative territory, but this may not be for long with companies predicting positive output growth next quarter (Q2).

Exports Export Supply Chain Stock Image
Further stabilisation is expected during the next quarter (Q2), particularly in export orders. But challenges remain.

Total orders have remained negative in Q1, but are similarly up from a six-year low, suggesting that they may have started to stabilise.

UK orders were at -13% and export orders at -10%, signalling that demand from the domestic market and abroad is not as weak as before.

Further stabilisation is expected during the next quarter (Q2), particularly in export orders. But challenges remain.

While companies seem to be finding some growth hotspots around the world – aided by the recent fall in sterling – there is no sign as yet of a sustained improvement in the demand environment that will swing export orders back into positive territory in the short-term.

One of the major stories since the end of last year has been volatility in global stock markets. It is clear that manufacturers are still operating in a storm of global uncertainty. As well as impacting on exports, this is also weighing on manufacturers’ confidence to invest and boost headcount.

With concerns mounting about a more widespread slowdown in the world economy, the difficult outlook presents a particular challenge for companies considering bigger or longer-term investment plans. The gun being fired on the UK’s EU referendum campaign will potentially add to this sense of caution.

EEF’s Q1 Manufacturing Outlook can be downloaded here.

Sectoral variations continue to be the norm with a two-speed performance clearly evident. The drag from the exceptional difficulties facing the steel sector continues, while sectors exposed to the slump in the oil price continue to be the hardest hit with chances of a sustained recovery in 2016 looking slim.

In contrast, the transport sectors look set to continue on a strong growth path and the chemicals and pharmaceuticals sectors are likely to join them in the fast lane.

Aside from those sectors still dealing with a number of specific threats, it will be ‘steady as she goes’ for much of manufacturing. If we avoid the bigger pitfalls to global growth, manufacturing should see a return to modest growth this year, but the timing of an export and investment recovery looks less certain.

V&A Hydraulics wants to expand the company to the automotive, manufacturing and industrial sectors.
The transport sectors look set to continue on a strong growth path and the chemicals and pharmaceuticals sectors are likely to join them in the fast lane.

On this basis, EEF is revising its GDP forecast down from 2.1% to 1.9%. It is also shaving its manufacturing growth forecast down to 0.6% from 0.8%.

Chief economist at EEF, Lee Hopley commented: “After the gloomy end to 2015, this latest data shows a chink of light. But, we should not be getting the deckchairs out yet.

“The slide is bottoming out, but manufacturing is still in negative territory and faces a precarious climb back up amidst a storm of real uncertainty. In a two-speed scenario, the fact that even those sectors in the fast lane are not relaxed about the global outlook probably says it all.

“What these findings make clear is that manufacturers face challenge enough – they certainly don’t need more pressure from domestically generated uncertainty or costs.

“Already almost four in ten identify rising business costs as a key risk this year, while the proportion of companies viewing the UK as a competitive place to do business has fallen from 70% in 2015 to 56% this year. We’re urging the Chancellor to take this message on board and signal support for the sector by avoiding creeping cost and policy changes at the next Budget.”