UK manufacturing recovery still uncertain despite recent growth

Posted on 5 Sep 2016 by Jonny Williamson

UK manufacturing is seeing a mixed picture which could delay the prospect of a return to stronger growth until the end of 2016, according to a survey published today by EEF and business advisers, BDO LLP.

The EEF/BDO UK Manufacturing Outlook survey for the third quarter reveals that, despite last week’s stronger PMI data for August, activity levels remain largely unchanged from the second quarter, while manufacturers’ confidence about future prospects for the overall UK economy have taken a knock.

The positive export picture on the back of the fall in Sterling and stronger demand from the EU, US and emerging markets, is balanced by increased pressure on profits this quarter with price increases planned for the coming three months.

According to the survey, after a sideways move this quarter there is an expectation across the sector that output and orders balances will finally move into positive territory by the end of the year.

This looks to be supporting plans for recruitment across some sectors in the next three months, but is not yet sufficient to prompt a turnaround in investment plans.

Lee Hopley, chief economist, EEF.
Lee Hopley, chief economist, EEF.

Chief economist at EEF, Lee Hopley explained: “Manufacturers’ confidence collapsed in the aftermath of the referendum, but our latest survey provides some relief that this has corrected.

“Signs of an export revival are helping to drive more optimism about activity in the second half of the year, but concerns about whether the UK economy can shrug off post-referendum challenges is clearly evident.

“These risks are expected to hit some sectors such as with industries linked to investment goods and construction harder than others. Despite the short-term outlook for manufacturing remaining broadly stable, the continued downward slide in investment plans should keep policy makers alive to the potential risks facing the sector.”

Partner and head, BDO UK Manufacturing, Tom Lawton commented: “While the outlook for the UK economy remains uncertain, manufacturers are more confident about their own business performance.

“This shows they believe there is a positive way forward from here and that Brexit might not have been the portent of recession.

“Some sectors are clearly facing longer term structural challenges where global factors are at play and these are unlikely to abate anytime soon. However, history shows that in difficult economic circumstances there are always sectors and companies that thrive on being driven to innovate, develop new products and search out new markets and customers. These are the factors that successful companies will be focusing on to continue this improvement in business performance.”

Key findings of the latest EEF/BDO Manufacturing Outlook survey:

  • Output went into reverse in the past three months, with the balance dropping to -7% from -4% in Q2, although this is expected to return to growth in the final quarter (+4%).
  • Order in-take also dipped slightly to -4% from -2%, with all sectors under-performing against expectations. The uncertain demand in the UK economy was reflected in a balance of –9% in the past three months and although the balance for the next three months has moved into positive territory to +4%, the domestic outlook remains uncertain.
  • Export orders have exceeded expectations moving into positive territory in the past quarter to +2%, the highest balance since 2014 Q2. In the light of the fall in Sterling manufacturers are far more positive about future export orders, +12%, with the biggest driver appearing to be demand from the EU.
  • Manufacturers’ recruitment of new employees, lost momentum in Q3 and fell into negative territory (-5%). However, future intentions have turned round to +8%, perhaps reflecting recruitment plans that were put on hold ahead of the referendum now being resurrected.
  • Investment prospects continued to fall, down for the fourth consecutive quarter to -10% from -9%.
  • Profit margins for UK manufacturing were squeezed considerably as a result of rising input costs from Sterling’s depreciation, with UK and export margins at -22% and -21% respectively.
  • EEF’s forecasts for UK growth were revised in July, following the referendum, and its growth projections for the economy this year and next remain unchanged at 1.7% and 0.8% respectively.
  • Forecasts for UK manufacturing output, however, have been revised up to 0.4% in 2016 (from -0.3% in July) and -0.7% in 2017 (from -1.1%).