Crash in Q3 output says EEF survey, but PMI shows August recovery

Factory output over the past three months fell to its lowest level since Q4 2009 and the orders balance was the weakest since Q1 2010, in a survey by manufacturers’ group EEF and business advisers BDO LLP.

Alarmingly, responses on orders from UK customers turned negative for the first time in ten quarters, in a survey which confirmed that manufacturers have felt some of the toughest trading conditions for nearly three years.

Following EEF/BDO’s last survey, some softening was expected but the extent of the fall in orders and output was much higher than forecast.

The survey indicates that slower demand both at home and overseas is hitting order books.

But the findings seem to contradict the Purchasing Managers’ Index, run by Markit/CIPS, which showed a rally in production in August, where domestic customers placed more orders.

According to the EEF survey, “pockets of growth still remain in some sectors, but overall confidence appears to be draining away,” said EEF chief economist, Ms Lee Hopley.

EEF and BDO say that the drop in export orders is not limited to sluggish demand in crisis-hit eurozone economies.

“The low orders is a particularly concern, the UK market is very weak with negative balances there,” Ms Hopley said. “But particularly on the export side, the analysis we’ve done and the conversations we’ve had with members shows that the fall in demand suggests this is not restricted to Europe.”

Hopley emphasised a very mixed picture for global demand: “Beyond Europe, there are many shades of grey – it depends where you are talking and what product class. In China, members say growth is slowing but there is growth there. Others are even saying China is just a much tougher market than it has been.”

The survey shows that firms are expecting orders and output to rally in Q4.

She continued: “It’s encouraging to see that companies are not planning for a further deterioration in conditions as we head into the final months of the year. But, the risks of a more prolonged period of weak growth in global markets, which would continue to make economic rebalancing an uphill struggle, can’t be ruled out.”

Tom Lawton, head of manufacturing at BDO LLP, agreed that companies had experienced a vicious summer’s trading, but pointed to better days ahead. “The results of the survey paint a dark picture with weakening markets across the board.

“However, it is not all bad news. Larger companies that have the ability to invest are continuing to do so and smaller companies are wary of not suffering a skill shortage by ensuring that they employ the best talent, [while] market conditions worsen. This indicates that manufacturers have learnt the mistakes of the past, are investing for the long term and are preparing themselves for an upturn in the market, whenever and wherever this may occur.”

Looking to 2013, Hopley said that it is important that the Government does all that it can to make business conditions easier for companies struggling with orders. Access to finance, especially, needs smoothing and better signposting. “We need to focus on where government can make a difference. There is an appetite to invest – is everything being done on the finance side to enable that?”

“There have been lots of different interventions to get lending moving, the latest – Funding for Lending – is a biggie and needs far more marketing and promoting. Something different needs to happen to get companies through the doors of their banks to take advantage of it.”