Exports continue to drive manufacturing sector

Posted on 6 Jun 2011 by The Manufacturer

Britain’s manufacturers are continuing to drive UK economic growth on the back of export-led demand, with manufacturers optimistic about growth prospects, according to a new survey published today.

The 2011 Manufacturing Outlook by EEF, the manufacturers’ organisation and BDO LLP, shows output and orders balances turned out as strong as expected in the last quarter, marking the sixth consecutive quarter of growth. It also follows a jump in the number of employment vacancies in manufacturing over the past three months. Alongside the positive investment intentions, the survey indicates a further gradual improvement in confidence.

Over the last six months, when the economy as a whole stagnated, manufacturing grew by 2.3%. Since the recovery began, despite only accounting for around 13% of the economy, manufacturing has been responsible for one third of economic growth. Even in the first quarter of 2011, where the industry’s growth rate slowed a little, manufacturing accounted for approximately one quarter of total economic growth.

However, the ability of manufacturers to manage the volatility of input costs is now a greater concern, with signs that fewer companies, particularly in consumer facing sectors, are able to pass on price rises with pressure on profit margins returning.

EEF Chief Economist, Ms Lee Hopley, says that recent predictions of upcoming turbulence in the manufacturing sector have proven unfounded but concedes that increased costs continue to trouble the sector. “Cutting through some of the noise from temporary factors over the past few months our survey continues to show underlying strength in output and orders. Providing buoyant demand from overseas markets holds firm, we should see growth maintained through the rest of the year.

“However, the flipside of strong global demand has been upward pressure on a range of input and commodity prices, which has become tougher to manage. But manufacturers’ plans to invest for future growth suggest there is some confidence that they will be able to navigate this and other challenges in the months ahead.”

Tom Lawton, Head of Manufacturing at BDO LLP, said: “On the back of healthy output and order books, the intention to recruit amongst manufacturers has remained strong, with official data showing record levels of vacancies. However, the key issue is whether companies are able to meet their intentions and fill their vacancies with the highly skilled workers they require.

“What we are witnessing among our client base is the willingness to recruit – but it’s often very difficult for employers to find people with the adequate skills set to fit the role. We are faced with a short term problem that can only be overcome by long-term solutions. To ensure the UK retains its competitive edge, the Government must do more to emphasise education in engineering and manufacturing to guarantee its future workforce has the appropriate skills to deliver the sector’s needs.”

Over the last three months, output and new order balances were +28% and +30% respectively, up from +25% and +20% in the previous three months. This growth continues to be driven largely by export markets where the balance of responses remains near record highs at +28%. The domestic orders balance was +19%.

The survey was notable for continued strong levels of recruitment intentions +24%, backing official data which showed last month a record for manufacturing vacancies. Investment intentions also remains strong +18%, though this has yet to translate into official data.

However, previous improvement in profit margins has gone into reverse in the past three months. Over the last three months a balance of 13% of companies saw domestic margins deteriorate and 4% saw a similar picture on export margins. While a balance of 16% of companies increased both domestic and export prices in the past three months, this was considerable lower than in the previous quarter suggesting the ability of manufacturers to pass on costs may have peaked.

Optimism amongst companies remains for the next quarter with a strong balance of 27% of companies expecting output to increase in the next three months. Whilst prospects for new orders softened slightly this was to be expected after recent record highs. EEF’s forecast for manufacturing growth, at 3.2% this year, is down slightly from the previous quarter. Engineering is projected to expand by over 6%.