Stability is here but slow growth in 2010

Posted on 4 Dec 2009 by The Manufacturer

Conditions have improved and orders have stabilised in the fourth quarter 2009, but only modest growth is forecast for 2010, an EEF report shows.

New orders and output across manufacturing have stabilised, the Engineering Outlook report says. While new orders have still declined in Q4, the rate of decline has eased and exports are finally showing the benefits of a weaker pound, after the recession had delayed this expected effect. EEF said the picture of stability had evolved as companies had expected.

“The story is stabilisation, but there are still headcount adjustments and there is not enough confidence in the sector for investment to pick up,” said Lee Hopley, EEF’s chief economist. Further recovery in manufacturing in 2010 would be muted, while in the engineering sector the report shows stagnation through 2010.

“We’re clearly over the worst effects of the downturn, but we’re not likely to see a rapid rebound in activity in the short term. Companies are very cautious and several big challenges remain on the road to recovery,” she said. This includes exchange rate volatility adding uncertainty, the financing of capital investment needs and the further need to improve supply chain communications to understand trade flows and minimise redundancies.

Most sectors continue to see some improvement, where output has recovered from -25% to -3% in the last three months. Electronics and electrical goods recorded output increases in Q4, electronics rallying by +20%, while mechanical production showed a very small rise. In other sectors, most experienced a smaller contraction of output than in the previous quarter.

Margins for goods sold in both domestic and export markets rallied well in Q4, and domestic margins were back to near 2008 second quarter levels, about -9% change on the previous quarter.

Unemployment continues while the balance of change from the previous quarter is -10%, a smaller difference than last quarter’s -28%. While companies reported more cash flow, investment has lagged cash levels as expected, as companies exercise caution before making big capital purchases. Investment is expected to recover very slowly next year.

EEF emphasised that rapid recovery was not in prospect. Export markets are expected to provide some growth, with recovery in Asia and the postponed effect of the weakened pound driving this. Tom Lawton, head of manufacturing at business advisers BDO LLP, said his clients who manufacture basic engineered products were seeing stronger demand from Germany and western Europe and attributed the pound’s competitiveness.

Lawton identified three concerns for companies in 2010 as recovery comes: Access to credit, where firms reported being uncomfortable with sources of credit and were still in cash-keeping mode, foreign exchange becoming a board room issue, where more firms are using forex as a hedging instrument in buying inputs, and how pension deficits will be a drag on new investment.
“The impact of foreign exchange on results is becoming very pronounced and more firms are hedging in other currencies,” said Lawton. “The response to the low pound was slow but it’s now visible.”

Growth in 2010 will be slow, the report suggests. While forecast GDP shows a modest rise of 0.8% for the year, manufacturing growth is slightly higher at about 1.1%. Engineering is forecast to stagnate with negative growth.

Will Stirling