EEF: Growth forecast softens as manufacturers lose momentum

Posted on 2 Jun 2015 by Callum Bentley

The latest quarterly Manufacturing Outlook survey, published by EEF, and global law firm DLA Piper reveals a picture of weaker than expected growth for the sector in the second quarter of the year.

The findings reveal a loss of momentum in the sector and a weakening in some key indicators. As a result, EEF is softening its 2015 manufacturing growth forecast to 1.5%:

Key findings

  • Output and orders remain positive, but edge lower in Q2
  •  UK demand weakens and exports remain flat
  •  Confidence slips, leading to softer recruitment and investment intentions
  •  Signs of improving demand in some export regions, most notably in Europe, while sectors  supplying consumers or construction see activity holding up well
  •  EEF softens growth forecast to 1.5% for manufacturing and 2.6% for the economy overall.

Despite companies forecasting a pick-up in activity in 2015, the Q2 findings underline a loss of momentum across manufacturing in the first half of the year. Output and, particularly, orders have edged lower in the last quarter. The sector is still in positive territory, but showing signs of a steady weakening in key indicators, most notably in UK demand and investment plans.

However in CBI’s May Growth Indicator, a different story is told. While it only points to modest growth in the UK manufacturing sector, it casts a more positive light than that of the EEF survey, stating that output growth improved from last month’s twenty-two month low, but remained fairly modest. Manufacturers continued to anticipate a small increase in growth in the coming three months, although expectations were no stronger than they were in April.

A key factor carried over from Q1 shown in the EEF survey, is the impact of slowing activity in the oil and gas sector on supply chain industries, where investment delays have knocked UK orders. At the same time, despite being buoyant in recent years, investment intentions have dropped. This could result in investment levels growing at a slower pace than seen since 2012.

With manufacturers telling a similar tale regarding recruitment intentions, optimism has unsurprisingly faded. And, while forward looking expectations remain positive, confidence about the next quarter and the next year has notched down. As a result, EEF is softening its 2015 manufacturing growth forecast to 1.5% (down from 1.7%) and to 2.6% (down from 2.8%) for the economy overall (GDP).

The survey does contain some bright spots however. While exports remain flat, a third of manufacturers are feeling more confident about European sales prospects and this is driving stronger expectations for exports in the coming quarter. At the same time, sectors supplying to consumers or construction have seen activity holding up well – a trend that looks set to continue into the next quarter.

Oil field drilling
A key factor carried over from Q1 is the impact of slowing activity in the oil and gas sector on supply chain industries.

Ms Lee Hopley, chief economist at EEF, commented: “Manufacturing is still growing, just not at the pace anticipated at the beginning of the year. The sector is still in positive territory, but the ground is looking a lot less firm beneath its feet.

“Much of this weakening is down to the impact of the decline in oil and gas activity on the supply chain. There is a range of challenging factors at play, but the net result is that this weakening trend looks set to continue, potentially even through to the end of the year.

”A resilient and productive economy needs a vibrant manufacturing sector, investing in technology, innovation and people. The sector has seen a good run of not only growth, but employment, investment and productivity gains over the past couple of years and it’s vital that the new Government takes all necessary steps to enable this to continue into the future.”

Richard May, partner and head of the manufacturing sector at DLA Piper, said: “There was a lot of uncertainty in the run up to the UK election with few predicting such a decisive outcome. Whilst the overall outlook for the manufacturing sector is still one of growth, hopefully a majority government and the promise of increasing economic stability will boost confidence and have a positive effect on manufacturers in the second half of the year.”