In this final article of 2009 we look at the impact of the challenges which UK manufacturing has faced and the prospects for 2010. Peter Brotherton, director of RBS’s Sector Client Coverage business and Thorsten Fischer, RBS’s senior economic adviser, summarise.
The manufacturing sector, like the rest of the UK economy, has seen a severe recession. It is now stabilising however, even as some of the recent output measures point to ongoing albeit slowing declines.
Between its peak reached in February 2008 and its trough in August of 2009, manufacturing output fell by 15.3%.
It has since rebounded slightly, but stands close to where it was 15 years ago (see below).
Consumer non-durables, which include many non discretionary items, such as food and household staples, have withstood the downturn much better than consumer durables. Output of the consumer non-durable goods industries fell by 6.6% from peak to trough compared to 21.4% for consumer durables, 21.6% for intermediate goods and 19% for capital goods, the latter reflecting the slump in business investment.
Profitability has been a weak spot of the sector.
The net rate of return for manufacturing companies in the second quarter of 2009 stood at 6.7%, much lower than the 9.2% recorded in 2008 and the lowest since the 1990s recession (see below).
Weak profitability is a function of the recession as output has fallen much faster than capital employed. As the manufacturing sector recovers, we expect profitability to pick up again. As a legacy of plummeting demand and weak profitability, liquidations continue to rise.
Survey data provide reasons for optimism
External surveys have to be treated with care but they do provide encouragement for the sector.
October data points to the fastest expansion in almost two years. Indeed, the data have been consistent with positive growth for five months now.
The outlook for consumer and intermediate goods points toward expansion, while the downturn in investment goods continued. SMEs and largesized companies both saw production rise during October. Rising new orders suggest that the expansion may be sustained as trading conditions continue to improve.
The CBI’s Quarterly Industrial Trends Survey is not quite as optimistic.
It fails to show an expansion in output, but points to a considerable easing of the decline in manufacturing output.
The balance of respondents expect modest growth over the next three months. The survey confirms that businesses expect sterling’s weakness to help exports.
The necessary rebalancing will favour manufacturing
Manufacturing offers good opportunities given that the UK economy has to rebalance. We expect growth to be driven by exports and investment, while the consumer sector and government will do much less heavy lifting, as they will be focused on repairing balance sheets. The weaker pound acts as a catalyst for the necessary readjustment, by helping export-orientated manufacturers to gain market share from their foreign competitors. It will also help manufacturers focused on domestic markets by making foreign imports more expensive. The effects of a weaker pound are not yet evident as global demand growth remains subdued, but they will become more visible once the global economy embarks on a sustainable path of recovery.
The Consensus Forecast expects manufacturing to outperform the broader economy in 2010. We agree, and expect manufacturing to see discounted accumulated growth of 8% through 2013 compared to 5% for the broader economy.
Lending as measured by outstanding balances has declined considerably since the onset of the recession. According to Bank of England lending data, net lending to the manufacturing sector turned negative during the fourth quarter of 2008 and has remained negative since then as businesses reduce debt and curtailed expansion and capex initiatives (see below).
In response to this RBS continues to seek new & innovative ways of working with the manufacturing sector to help provide funding for growth. We shall devote our contribution to the January issue of The Manufacturer to this important subject.