Dip hits mechanical engineering sector

Posted on 25 May 2012

A fall in demand hit the mechanical engineering sector as orders dropped and investment weakened during April.

Increasing uncertainty in some European markets combined with falls in domestic demand from previously strong sectors such as food and drink and defence led to lower orders figures for engineering firms according to the Engineering and Machinery Alliance (EAMA).

Previous results from EAMA’s Monthly Business Monitor have been bullish but there has been a sharp downturn, which raises the question of whether this is a pause or the start of a new trend. “Overall enquiry levels were weaker, particularly for export business,” said EAMA chairman Martin Walder. “And on orders, the balance between gainers and fallers actually turned negative for both the UK and exports market.”

Mr Walder said that the mechanical engineering sector has been hit by the Government’s cut in the annual investment allowance from £100,000 to £25,000. “We think is a mistake,” he said. “Although we don’t see the reduction as the main cause of the weaker performance, we do believe it has affected investment plans and government ought to reconsider as soon as it can.”

Among the weaker aggregated results, some subsectors, high tech precision skills, supplying into automotive, aerospace, oil & gas and medical are still reporting strong business and investment plans. But these are the exceptions now rather than the rule.

According to the survey, confidence has weakened and SMEs are much more wary of investing than they have been previously.

“In the summer months this fall wouldn’t be a surprise, but at this time of year it’s a cautionary sign.  If you exclude the usual month-on-month dips over the summer months, you have to go back to May 2009 to find similar levels in the Monitor,” commented Walder.

Since October 2010 more than half of firms reported some real investment activity but there has been a reverse in early 2012. April is the second month in a row that the majority, 53% in March and 57% in April, have said that they are holding back on investing.

Firms may be waiting to see if the machinery orders stemming from recent industry trade shows such as MACH 2012 and DRUPA materialise as expected.  If they do, then investment intentions will improve and the job vacancy rate will continue to offer alternative employment opportunities.