EEF blog

Insights into UK manufacturing

June's Monthly Briefing

Felicity Burch June 03, 2014 15:34

Click on image to enlarge

 

 

Momentum in May

Neil Prothero June 02, 2014 12:08

The purchasing managers' index (PMI) compiled by Markit and CIPS came in at 57.0 in May, signalling the thirteenth successive month of improving business conditions in the manufacturing sector. Here are the key points from the survey:

— PMI down marginally to 57, from five-month high of 57.3 in April

— Broad-based rise in consumer, intermediate and investment goods output

— Growth in new orders from domestic and export markets

— Thirteenth successive month of job creation

— Third consecutive monthly fall in input costs

Manufacturing PMI
(50 = no change)

Source: Markit/CIPS

Positive signs

The May PMI data indicate that the manufacturing sector is firmly on track to expand for a fifth consecutive quarter in 2014Q2, its best performance in four years. The headline index edged marginally lower last month, but was still the fifth strongest reading in the past three years and far above its long-term average of 51.4. Despite the slight dip, the PMI average for April-May, at 57.2, is higher than the Q1 average of 56.2.

Encouragingly, the latest survey data paint a positive scene of broad-based expansion, not only in terms of rising new orders across the consumer, intermediate and investments goods sub-sectors, but also in an improving export demand picture to complement the robust domestic market. According to Markit, new product launches and firms’ efforts to boost market share were key drivers behind a pick-up in new export business. An upturn in export orders would be welcome, as the rebalancing story for the UK economy still requires a significant boost in net trade to support the recent rebound in business investment.

Jobs boost

A thirteenth consecutive month of rising employment was spread across all the main sub-sectors and in companies of all sizes, suggesting that the healthy upward trend in official manufacturing jobs data since the start of 2013—the longest period of employment growth in the sector since the mid-1990s—is set to continue. Manufacturers’ improving cashflow position is helping to sustain confidence, supported by strong demand and a further decline in input costs (reflecting in part the relatively subdued trend in global commodity prices).

Overall, as Lee noted in her recent Executive Survey catch-up, manufacturing is on track for a solid year of growth in 2014, more than making up the lost ground over the past two years. But with output still 7.6% below its pre-crisis level of early 2008 there is considerable scope for further catch-up and a need to build on the recent positive trends to sustain growth over the medium term.

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Food and Drink manufacturing - the infographic #ukmfg

Chris Richards May 30, 2014 10:18

Latest figures have shown that along with the UK's Aerospace and Other Transport manufacturing sector, Food and Drink manufacturing has also returned to its pre-recession peak. To celebrate, in this - British Cheese Week, we've put together an infographic highlighting some key numbers from the UK's largest manufacturing sector, click on the image below. 

Take a look at some of our other Sector Friday blogs covering forecasts and trends in each sector of UK manufacturing.

Innovation: keeping pace with the competition

Felicity Burch May 29, 2014 10:59

I took a trip up to Glasgow last weekend, and while I was there visited the excellent Kelvingrove museum. There was a section of the museum dedicated to the role of design and innovation in manufacturing, and I was particularly struck by this quotation from a Scottish politician:

“Rapidly improving design permeates every branch of manufacture…. To keep abreast with foreign nations… we must ourselves produce and invest”

This was said by Sir John Muir the Lord Provost of Glasgow in 1890, but it still rings true today. Innovation is a key tool that enables manufacturers to compete. But in our Innovation Monitor survey 2013 we found that for companies competing in global markets, it is not enough to innovate once. In order to beat the competition – both at home and abroad – companies must keep responding to their customers’ needs, and keep innovating.

Manufacturers have often told us: there is no such thing as a sustainable competitive advantage. Looking at what’s happened with R&D expenditure highlights just this. Over the last decade, the UK’s expenditure on R&D grew by just over 10%, but was this enough?

UK R&D expenditure as a percentage of GDP flat for nearly a decade 

The growth in R&D expenditure between 2002 and 2012 kept pace with GDP, but it it didn't keep pace with competitors. The UK’s R&D intensity (expenditure on R&D as a percentage of GDP) has remained at about 1.7% or 1.8%. Over the same period, Germany's R&D intensity has risen from 2.5% to 2.9%.

And the rest of the world is catching up quickly. 

Although in the UK the manufacturing sector is more R&D intensive than the rest of the economy, the relatively low levels of R&D expenditure across the economy as a whole need to be addressed, in order to ensure the UK can remain highly productive and competitive in global markets.

Innovation is challenging and risky; there is an important role for government support to play to help firms innovate successfully. As we have previously argued, there is much about existing government support to be positive about, but more can be done. We will be publishing Innovation Monitor 2014/15 in partnership with NatWest this summer, which will include some recommendations in this area.

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Manufacturers must show the next generation we Make It Britain

Verity O'Keefe May 28, 2014 13:38

63% of manufacturers think initiatives between schools and businesses will encourage more young people into manufacturing.

Building the link between schools and local industry is crucial if we are to inspire the next generation of workers into industries such as manufacturing.

Exposure to the real working world is vital, and for that reason manufacturers are engaging in a number of activities to encourage young people to consider a career in manufacturing.

Seven in ten manufacturers offer work experience to young people and over half go into speak in schools or invite schools to their sites.

A recent report commissioned by the Association of Colleges found that school children themselves are asking for more ‘Have-a-go’ experiences. Manufacturers themselves are best placed to showcase the opportunities within the industry and teach young people about the skills-sets required for such a career.

We have blogged before on the need to myth-bust some of the barriers employers cite about engaging with schools (Health and Safety, insurance liabilities and CRB to name a few) but the common barrier that comes up, particularly amongst small businesses is difficulties making contacts with schools.

That’s where platforms such as Inspiring the Future come into play and a fantastic job they do too. Inspiring the Future gives young people insights into different careers, bringing together employers and employees with local schools.

Employers and schools have asked for more tailored initiatives so they can showcase their industries and sectors and so Inspiring the Future is hosting a special week (30th June to 4th July) focusing on careers in design and manufacturing.

In celebrating great British manufacturing, the aim of the week is to encourage far more young people to explore careers in an industry which employs 2.6million people You only need to check out our most recent fact card to see just how much manufacturing contributes to our economy (and to find out that manufacturing has above average earnings!)

And manufacturing is all around – I wonder how many school children think about how manufacturing and engineering is behind the trains they travel in, the mobile phones they have, the shoes on their feet?

We must get the message out to young people that there are futures to be had in designing and making things, and this week provides the opportunity to do so,

Over 75% of state secondary schools have signed up to Inspiring the Future – so it’s not short on schools. The platform also prides itself from an army of 14,000 volunteers from 4,000 companies. But it needs more manufacturers.

So a call to action for manufacturers please – if you want to inspire the next generation of workers, your future employees then step up and sign up to the Inspiring the Future’s Design and Manufacturing Week. Let’s show our young people how we Make it Britain!

More details here and check out the Design and Manufacturing week flyer.
 

Executive Survey 2014 – Half time

Lee Hopley May 27, 2014 10:58

We kicked off 2014 with our annual Executive Survey; a look ahead at manufacturers expectations for the next 12 months.

We’re at the half way point, so a good time to check in to see if trading conditions, opportunities and potential risks are so far playing out as expected.

First a quick recap of the Survey headlines:

  • 70% of manufacturers were forecasting improved economic conditions over the next 12 months in the UK compared with 30% at the start of 2013.
  • 62% expected a stronger industry performance, up from 30% the previous year.
  • Expectations on employment, sales, profits and productivity were all more positive than in the previous two years.
  • The main growth opportunities were seen as increased demand in emerging markets and from sales of new products
  • There were still risks aplenty, with the biggest movers on the 2013 upward pressure on pay; rising input costs and insufficient supply chain capacity. Exchange volatility still featured strongly with over a third of manufacturers citing as a risk to growth.

The story so far:

Manufacturers’ growth expectations are on track. Output was up 1.4% across manufacturing in the first three months of the year – the fastest pace of growth since mid-2010 and the highest level of output seen for two and a half years.

Employment and productivity are on an upward trend. Not much data for 2014 thus far but 2013 finished with output per hour is manufacturing increasing at its fastest pace since the start of 2011 and the sector also notched up its fourth consecutive quarter of employment growth.

Export growth not quite as expected. At the start of the year 43% of manufacturers were planning for an overall increase in export sales this year – as discussed previously – this has been the cloud in an otherwise brighter outlook.

So far, so fine … what about those risks?

The biggest shifts among potential 2014 risks were:

% of companies citing as biggest 214 risk to growth
Source: EEF Executive Survey

1. Rising input costs – citied by a third as the biggest risk to growth and up 16 percentage points from the previous year. One of the main concerns here was the rising price of energy, particularly relative to competitors. A large element of this was domestically inflicted taxes which were set to push up UK energy costs. Steps were taken in Budget 2014 to hold down green levies, which should go some way to mitigate future worries on costs. Elsewhere, input costs have been edging down gradually so far this year. 
 
2. Significant upward pressure on pay – cited by 8% as the main risk to growth, up six percentage points from a year ago. Again, big hikes in pay have not materialised in the two major pay rounds so far this year, nor will we see an inflation-busting increase in the minimum wage later this year. As our blog last week showed settlements across the sector have been stable at around 2.5% for the past two years. However, growing skills shortages will be putting pressure on pay for some occupations.

3. Insufficient supply chain capacity – cited by 10% as a main risk to growth, up five percentage points from a year ago. This was a clear feature of discussions during the early phase of recovery back in 2010 as investment cut backs had left some companies ill-prepared for an upswing in demand. With growth picking up pace, but investment only following now, supply chain constraints are likely to re-emerge.

Exchange rates are also worth a mention as arisk to growth, the last word on that goes to last week's blog - A Sterling performance? 

Manufacturing does appear to be on track for a solid year of growth in 2014, as companies were planning for at the start of the year. So far, factors that could derail the recovery have not materialised, but there are still plenty of issues that manufacturers and policy-makers will need to remain live to if the UK is sustain and build on this growth - not just through 2014, but in the longer term.

 

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Pay Bulletin in May

Joey Lee May 23, 2014 12:00

Our Pay Bulletin for May was published earlier this week. It is a monthly comprehensive survey of pay settlements, deferments and pay freezes in over 400 of our member companies. It consists of two main parts: pay trends and inflation trends.

How is pay trending?
The three-month average pay settlement edged down to 2.5% year on year in April, from a downwardly revised figure of 2.6% in March. After the revisions, our data are now consistent with the average level of settlements we have seen since the beginning of 2011.


Source: EEF Pay Bulletin

The proportion of pay freezes was stable at 6% in the three months to April. The figure has been slowly picking up since the beginning of 2014, as shown below:

Source: EEF Pay Bulletin


The labour market statistics published by the ONS on Tuesday confirmed that, despite slowing slightly, pay growth in manufacturing continues to outpace trends in the broader economy. In the three months to March, pay rose by 2.9% year on year in manufacturing, a drop of 0.3 percentage points from the three months to February; whereas in the whole economy, pay rose by 1.7%, unchanged from the previous month.

And what about inflation? UP!
The annual CPI rate of inflation rose 0.2 percentage points to 1.8% in April, the first rise in ten months. The increase in the rate was mainly driven by higher airfares and transport costs, as well as motor fuels prices. Apparel sales seem to be blossoming (Easter and new Spring/Summer stocks), as prices have risen across some retailers. Declining prices of food and non-alcoholic beverages offset the upward movement moderately.

As the Easter effect on airfares and retails fades, we expect to see CPI inflation stabilise below the 2% target for the rest of the year. As we reported in previous months, there is so far little sign of any emerging inflationary pressures from manufacturers, commodities or the supply chain, whilst the stronger pound will continue to push down import prices. Wage growth expectations from various surveys suggest that pay settlements will only take a gradual step up. The chance of a significant upward revision to the near-term inflation forecast therefore, is relatively low.


For a more in-depth insight of the CPI, please refer to Felicity’s blog from Tuesday.

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Investment recovery starts to bloom

Lee Hopley May 22, 2014 10:12

The first estimate of GDP growth in 2014q1 showed another solid quarter of expansion for the UK. As usual we get a bit more detail in the second cut of numbers released this morning, and there were some encouraging trends - particularly on business investment. But first, the key points: 

GDP Headlines

  • Growth unrevised - GDP up 0.8%, manufacturing up 1.4% in the first quarter.
  • Business investment grows for 5th consecutive quarter - up 2.7%.
  • Exports down - no contribution from net trade at the start of 2014.
  • Households were the main contributor to growth, with spending up 0.8%.

Business invests

Economists have been talking about rebalancing for long time now, but with news that business investment recorded another quarter of growth in the first three months of the year, we may now be seeing clearer signs that the recovery is beginning to broaden out.

Indeed, in contrast to the trend of continuous downgrades to investment forecasts, growth in the first quarter came in a bit stronger than we'd expected. 

As after a long wait for a recovery in business investment we've got five consecutive quarters of growth - last seen in 1998; and the highest level of business investment since 2008q3. Still, we are only edging towards pre-recession levels (still around 17% below) which arguably weren't that great a starting point.

Investment growth, £bn

There's always a but .... exports

The other component for better balanced growth is positive contributions from net trade. Today's data don't shine much new light on this - we know from earlier trade statistics that the year didn't get off to a great start with exports declining by 1%. Imports also fell leaving the net contribution from trade at 0. Over the past four quarters trade has only boost growth in one.

That could change. Business surveys have been more upbeat about new order intake from overseas customers and expanding activity, as signalled by today's flash PMIs, in Europe, should bode somewhat better for the exports in the official data in the coming quarters.

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May MPC meeting – summary of minutes

Neil Prothero May 21, 2014 15:23

It may still be some time before the economy actually sees a rise in official interest rates, but there are growing signs that sentiment in the central bank is beginning to shift. More than five years after the Bank of England (BoE) cut its policy rate to a historic 315-year low of 0.5%, the minutes published today of the May meeting of the Monetary Policy Committee (MPC) continued to present a dovish tone, but also hinted that debate is likely to become more intense over the coming months.

The decision

The minutes confirmed that all nine MPC members voted to maintain Bank Rate at 0.5% and the stock of purchased assets at £375 billion at the meeting on May 8th.

The emerging story behind the decision

According to the minutes, the central view of the MPC was that the margin of spare capacity in the UK economy remained in the region of 1-1.5% of GDP, that inflationary pressures remained subdued, and that the date at which financial markets were pricing in the first rise in Bank Rate remained around the spring of 2015. The key question, however, is how long is this consensus view likely to last, given the steady stream of robust economic data (the latest of which signalled buoyant retail sales and mortgage lending in April), still weak productivity trends and concerns over rapidly rising house prices in parts of the economy.

There were some clear hints in today’s report of diverging opinions within the MPC. The minutes explicitly note "a variety of views on the appropriate path of monetary policy", while also stating that "It could be argued that the more gradual the intended rise in Bank Rate, the earlier it might be necessary to start tightening policy".

These specific references are the most hawkish that have appeared in the MPC minutes for some time, and contrast with the more downbeat tone adopted by the BoE governor, Mark Carney, who has been keen to stress the continuing signs of slack in the labour market and the fact that UK output is only now returning to pre-crisis levels.

That said, it is impossible to read too much into the implications of the MPC’s current musings, given that the rate-setting Committee is about to welcome three new members over the next few months. So far there are few clues about how the newcomers are likely to vote.

Overview of the May minutes

Here’s an overview of the main economic developments and issues noted in the minutes.

Global Outlook

  • Recent data had been mixed, but MPC’s expectation of sustained global expansion was broadly unchanged.
  • Unexpected weakness of US GDP in Q1, but rebound expected in Q2 after poor weather and one-off factors.
  • Indicators continued to point to declining momentum in China, amid banking-sector risks.
  • Modest strengthening of activity in the Eurozone, but still a long way to go in adjustment process. Further monetary stimulus from ECB was likely.
  • Commodity prices remained sensitive to political uncertainty in Ukraine.

Financial markets

  • Asset price volatility was relatively low, but likely to increase as advanced economies return to more normal policy settings.
  • Further rise in sterling effective exchange rate, supported by domestic demand growth.

Domestic market

  • Business surveys pointed to strong near-term growth. BoE currently forecasting 0.9% GDP growth in Q2.
  • Central view that growth would ease a little as pent-up demand faded, but remain relatively steady.
  • Credit Conditions Survey indicated improving spreads and availability of lending, but bank lending to companies weaker than expected in Q1.
  • Slight softening in mortgage lending data, but conditions for continued momentum in house prices remained in place, especially in London.
  • BoE Agents noted growing concerns over a shortage of properties for sale, which "might be due to prospective sellers holding out until prices rose further".
  • Reforms associated with the Mortgage Market Review (MMR) had recently come into force. Too soon to draw conclusions about medium-term impact.

Prices and costs

  • Unemployment rate had fallen below the 7% threshold set out in the MPC’s guidance in August 2013, triggering the next phase of forward guidance.
  • Tentative signs of a slight pick-up in nominal wage growth.
  • MPC expected wage growth to accelerate gradually as productivity improved and as slack was reduced.
  • But still considerable uncertainty around the timing and extent of any strengthening.
  • Outlook for inflation little changed, with CPI rate projected to be close to 2% target in two to three years’ time.

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CPI inflation rate ticks up in April

Felicity Burch May 20, 2014 10:12

ONS figures released this morning show the CPI inflation rate in the UK ticked up to 1.8% in the year to April, from 1.6% in the year to March.

The timing of Easter (which was in March last year and April this year) will have played a part in the rise in inflation, with transport costs such as air fares having increased between March and April 2014, compared with a fall between the same two months a year earlier.

Some other upward contributions to the rate of inflation were clothing and footwear; food and non-alcoholic beverages; and alcohol and tobacco.

Despite this month’s rise in CPI, headline inflation is likely to remain relatively subdued for a number of reasons:

Strength of sterling - this reduces the price of imports, which should push down inflationary pressures. Import prices fell 5.9% in the year to April, the seventh consecutive month to show a fall in the annual rate.

Linked to this, the price of producer inputs has been falling. Producers’ input prices fell 5.5% in the year to April. Prices for most inputs were falling over the 12-month period.

 

Wage growth remains relatively subdued. Although manufacturing pay growth was up 2.9% year on year in the three months to March, for the economy as a whole average weekly earnings only rose 1.7%.

Disclaimer
This is an informal blog about manufacturing and the economy written by EEF's policy and representation staff. While it is written from an EEF perspective, contributions should not be taken as formal statements of EEF policy, unless stated otherwise. Nor does it cover all the issues on which we campaign - you can check these out in more detail at our main site.

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