With production figures showing manufacturing output up and growth of close to 5%, confidence is starting to return to the sector, says EEF’s Steve Radley. Now, for government to make good on those promises...
In the run up to the election, politicians of all shades talked about rebalancing the economy with a manufacturing playing a greater role. And EEF has been highly vocal in setting out what a new government should do to achieve this. But the latest evidence suggests that manufacturing is already starting to mount its own recovery.
For example, the production figures for March show manufacturing output up by 1.2% in the latest three months on the previous three – equivalent to annualised growth of close to 5%. And a range of business surveys, including EEF’s, suggest that this is set to continue, with order books at home and particularly abroad rising. Of course, there’s still a lot of ground to make up with manufacturing output remaining 10% below where it was in 2007, but the trends are encouraging.
A number of factors are driving this improvement: in particular, the pick-up in world markets and the competitiveness of the pound, though some of this has been unwound by recent weakness in the euro. But largely overlooked has been the big improvement in efficiency manufacturers made in the recession that leaves them well placed to take advantage of the recovery.
Going round the country, I have heard countless accounts of companies that are now profitable despite the collapse in their markets in the previous two years. As output starts to expand, this should show up in the productivity figures.
The big question is whether this can be sustained, and there are certainly a lot of uncertainties out there. For example, manufacturers’ major market – Europe – narrowly averted a major crisis over the public finances in Greece and a number of other economies. So far, it looks at though the action taken by the ECB, the IMF and by EU member states has staved off a Lehman’s-type crisis, but the situation is likely to remain volatile and it will force a range of economies to speed up action to cut their deficits, which may depress growth in the short-term. The good news, though, is that many other global markets remain vibrant and UK manufacturers have got better at tapping into them. Fiscal tightening at home will also weigh on our economy in the short-term, highlighting the importance of developing markets abroad.
Another danger is inflation, which is some way above the Bank of England’s target and would lead to higher interest rates if the overshoot persists. Though we shouldn’t be complacent about inflation, much of its recent rise has been due to one-off factors and it should start falling again soon. Also encouraging is the fact that manufacturers are reporting a significant rise in pay deals, though pay pressures will prove harder to resist if inflation remains high. Perhaps more worrying is the rise in commodity prices and concerns over shortages of metals and other essential raw materials.
A combination of higher costs and the need to place larger order to secure supplies will place some manufacturers under cashflow pressure, particularly if their own order books remain short. If this continues it could increase the need for working capital, but so far the evidence is that demand for this has remain fairly muted and EEF’s latest survey suggest that the recent improvement in credit conditions has held firm.
One of the traditional constraints on recovery is skill shortages. With firms telling us that they are starting to hire again, this is likely to be a growing concern. However, the actions companies have taken to minimise job losses should mean that fewer of them are held back by skill shortages.
Nonetheless, it is vital that government supports industry by continuing to invest in apprenticeships and ensuring companies can access the right training.
Despite all these uncertainties, it feels that confidence is starting to return and this is reflected in improving investment intentions. And it is here that the government can help by sending out the right signals in this month’s Budget that it will support manufacturers looking to invest and drive their business forward.
Steve Radley, director of policy
