Overseas demand to boost UK manufacturing in 2018

Britain’s manufacturers are set to benefit from a boom in overseas demand this year, with companies said to be more optimistic about the prospect for the global economy than at any time since 2014, new research by EEF and AIG has shown.

UK’s manufacturers are set to benefit from a boom in overseas demand in 2018 – image courtesy of Depositphotos.

The balance of companies expecting an improvement in global conditions has reached the highest level in four years, the 2018 EEF/AIG Executive Survey has shown.

More than 40% of companies expect trading conditions to be better than last year, compared with 14% predicting world growth will be slower than 2017.

The optimism for the global economy contrasts, however, with the outlook for the UK market with more manufacturers expecting a deterioration in the UK economic conditions for the second year running.

The confident mood among industry executives is reflected in improvements across all firm level indicators in the survey – from sales to UK and export customers, to job numbers and profit margins.

The balance of companies expecting to see an increase in all the firm level indicators is positive for the first time in three years, with the responses improved in every case on a year ago.

According to the survey, this mood is tempered however by the continued upward trend in the proportion of companies who see more risks than opportunities in the year ahead with half taking this view, double the number of companies who see more opportunities.

Risks related to the UK’s exit from the EU continue to dominate in 2018, with concerns about the effects of rising input costs, loss of EU staff, exchange rate volatility or a disruption in a major market continuing to cast a shadow over an otherwise buoyant outlook.

However, far from being blinkered by Brexit, manufacturers have other risks on their radar, including their exposure to cyber breaches, with over six in ten saying that disruption due to a cyber-attack was on their risk radar for the year ahead.

It’s necessary to move into new geographic markets

Other risks identified include the capacity implications of subdued investment and other international ‘what ifs’, including an increase in protectionist sentiment in the US.

The survey has also revealed a range of actions that should help minimise the impact of these challenges, such as an increased focus on productivity, efforts to move into new geographic and sector markets, better employee engagement and action to manage cashflow.

The survey does not, however, identify major shifts in investment sentiment across UK manufacturing. Only a third of companies surveyed admit to making contingency plans for a no deal Brexit outcome and industry executives seem as likely to be considering reshoring as offshoring activity in the year ahead in response to Brexit and exchange rate risks.

All this continues to leave the outlook for manufacturing investment in 2018 finely balanced.

Almost 70% of companies expect productivity increase

The survey has shown that performance at individual firm level is set for a significant uplift, with 68% of companies expecting to increase productivity and almost three-quarters (72%) intending to boost investment in automation.

In contrast to some fears, this is not set to result in reduced employment as half of companies plan to increase their headcount (up from a third last year) in 2018 compared to just 10% who expect to reduce it.

Image courtesy of Depositphotos.

While the positive outlook is shared across sectors, companies in the capital equipment sector are most optimistic on the back of the increase in global investment with 60% of companies seeing growth in exports to both EU and non-EU markets in 2018.

The survey reflects the generally optimistic view of world trade and global markets, though this outlook is not without clouds on the horizon.

Chief among these are fears of an increase in protectionism with 50% of companies saying this would have a strong or slightly negative impact on their business plan, while 39% take a similar view of the impact of any sharp slowdown the Chinese economy.

Brexit is no reason to relocate business 

The potential risks which Brexit has exacerbated also feature prominently at the forefront of manufacturers’ minds though the survey provides no evidence that companies are, as yet, planning to relocate large parts of their operations to the EU or elsewhere.

While 7% of companies are planning to move production to the EU and 6% to a non-EU location, a slightly greater proportion (12%) are planning to move production back to the UK from the EU while 22% are planning to step up their investment in the UK.

Major risks highlighted come from the impact of Brexit on exchange rates in particular with 66% of companies seeing this as a risk. The impact on sterling is especially important with four fifths of companies viewing more volatility this year this as a risk, including over half saying parity between the pound and the euro would have a negative impact on their business.

Other risks associated with Brexit include the potential loss of EU nationals which is seen as a risk by 38% of companies and any relocation of major customers (31%).