UK manufacturers’ investment intentions at four-year-high

Britain’s manufacturers are ending the year with continued improvement in global demand and increased export performance, EEF's new survey has revealed.

UK manufacturers are continuing to ignore the ongoing political uncertainty at home as improved global demand is feeding growth – image courtesy of Pixabay.

According to the Manufacturing Outlook Q4 survey from EEF and BDO, UK manufacturers are continuing to ignore the ongoing political uncertainty at home as improved global demand is feeding growth across the supply chain.

As reported, this is compensating for weaker UK demand as the squeeze on living standards and Brexit uncertainty continues to take its toll domestically.

This strong performance, across all sectors and regions, has led EEF to upgrade growth forecasts for manufacturing for this year and next, meaning the sector will outperform the economy overall.

And, the positive conditions in the fourth quarter mean that 2017 will be the first since the financial crisis when both output and order balances have been positive in every quarter throughout the year.

The survey shows that the bounce in business conditions seen over the course of this year is driving the need for investment in more capacity to fulfil increasing customer demands.

And the report proves a second successive improvement in investment intentions, with the balance of companies planning more capital expenditure hitting a three and a half year high.

EEF chief economist, Lee Hopley explained: “Stronger global growth has cemented the foundations for growth in manufacturing this year, but the sector’s contribution to the UK economy has been greater than most expected.

“Not only have we seen consistently positive survey responses in each quarter this year, but growth has been evident across all industry segments and UK regions in 2017.

“There is some confidence that this momentum will carry into 2018, but as we head towards the Brexit end game we need manufacturing to produce the same trick of broad based growth again next year.

“As we see more companies investing and capitalising on global growth, we’ve become more upbeat in our forecasts for the growth outlook.

“Government’s Industrial Strategy is now out of the starting blocks, but it needs to maintain a steady pace on delivery of its policy commitments to anchor manufacturers’ growth and investment in the year ahead.”

Gap between export and domestic orders 

According to the survey, both output and total orders remained in very positive territory at +34% (+34% in Q3) and +30% (37% in Q3) respectively.

Looking forward, while the balances are expected to ease further from those seen this year, some of which have been historic highs, they are expected to remain very healthy.

The continued growth in world trade and weakness in the UK market has meant that the gap between export and domestic orders has continued to widen due to rising inflation, slowing consumption growth and Brexit uncertainty.

Export orders remained at the same level as in Q3 at +33% whilst domestic orders continued to soften, easing back to +12% from +22% in Q3.

While some sub-sectors are showing more resilience, the divergence in confidence between the UK market and rest of the world is likely to linger into 2018.

Nevertheless, longer-term confidence among manufacturers about their own firm-level fortunes continued to edge higher this quarter with growing pressure on capacity leading manufacturers to increase investment for the second quarter running, with the capital expenditure plans balance hitting its high level since 2014q2 at +20% (+15% in Q3).

This is being accompanied by continued robust recruitment plans across the sector, +22% in in Q4 compared to +25% in Q3.

As a result of the strong conditions for manufacturing through 2017 and the positive outlook for 2018, EEF has upgraded its forecasts for the sector to +2.1% and 1.4% respectively.

This is faster than the UK economy overall where, in line with the OBR forecasts at the Budget, EEF expected tepid UK growth of 1.5% in 2017 and 1.3% in 2018.