EEF blog

So far our blogs on EEF's 2013 Executive Survey have highlighted that

• Manufacturers are a bit more positive about the UK's economic prospects compared with a year ago.
• Views on industry sub-sector performance are more divided - transport expecting growth; metals looking at contraction.
• Some firm level confidence that increased productivity and sales can be achieved this year.
• It should be game on for exporters, but only in non-EU markets.

This final blog picks up on some of the more upbeat firm level indicators. A number of opportunities are driving these positive expectations.

The most cited growth opportunity this year is from sales of new products as manufacturers see the benefits of their focus on innovation efforts. The proportion of companies expecting to grow on the back of this has leapt to almost 50% from just 10% a year ago. New service offerings also feature as a route to increasing sales this year with 27% expecting to services to generate growth in 2013.

As noted in our market outlook yesterday manufacturers are more optimistic about demand prospects in emerging markets and 45% expect these regions to offer growth opportunities for their businesses in the next twelve months - on a par with last year.

Also in the top three areas of potential growth is the opportunity to diversify into new supply chains. Second- and third-tier suppliers continue to see the benefits of companies further up the supply chain try to build security into their supply base by dual-sourcing or finding local suppliers instead of relying solely on overseas ones.

Inevitably, in the current climate it's not all good news. There are still choppy waters to be navigated in 2013 and the main risk identified by manufacturers in the year ahead is the potential for the world economy to weaken this year, hitting demand for UK exports. This is a marked shift compared with a year ago when concerns were focused on supply constraints, particularly the cost and availability of raw materials.

Recently there have been both sharp monthly movements in the value of Sterling. Risks around exchange rate volatility were cited as a concern by fewer than one in ten manufacturers in 2012, this has risen to 37% in our latest survey. Medium and large companies, most likely to be involved in multiple export markets, were more likely to see exchange rate volatility as business risk this year. 

Small companies, however, continued to be concerned about their ability to access the external finance needed to invest and grow over the course of this year. Government schemes to support the flow of finance are hoped to deliver further improvements for SMEs over the course of this year. Our latest survey, and indeed evidence from others, continues to show that risks around credit availability are set to cast a shadow over growth prospects for the next twelve months.

No year is risk free for manufacturers, which are exposed to fluctuations in exchange rates and commodity prices; competition from around the world; a push to constantly innovate for new products and services; and ever-present demand uncertainty. The latter risk appears to be the most heightened in the year ahead and the fortunes of the sector and the UK’s ability to rebalance its economy will continue to be closely linked to global events. As our survey points to continued action by manufacturers to develop new opportunities to grow their businesses, there is room for some cautious optimism that the sector can remain on track for recovery. 

Two important piece of official data for manufacturing relesed today are swimming against the tide of negative economic news. 

Firstly on trade - the goods deficit shrank in May as exports rose more quickly (up 7.8% on the month) than imports (1.5%).  By market, UK exports saw a month on month rise to both the EU (including the troubled eurozone) and non-EU countries.  While there was a particuarly strong bounce in goods trade with non-EU manrkets more noteable is that the value of these exports surpassed sales to Europe in May by nearly £650bn.  This compares to the gap of nearly £2bn in export to EU and non-EU markets a year ago.

Compared with a year ago exports to both core and periphery countries are down (in France and Germany by 9.1% and 2.3% respectively).

Over the same period exports to China and the US were up 26.3% and 11.6%.

The good news wasn't just on the trade front.  Defying the PMI gloom in May, which had put the activity indicator at a 3 year low, manufacturing output posted a solid 1.2% gain, reversing the falls in April.  Even with the inevitable confusion that will come with the additional Bank holidays in June, we shouldn't be too quick to write off a positive quarter of growth for the sector in Q2. 

But as the chart below shows, it is volatility that has been one of the primary features of the output data since the beginning of this year.  While any growth is positive, in terms of the level of output we're pretty much where we were at the start of the year. 

But one of the key points that has emerged from our discussions with manufacturers is that there isn't one straightforward story for the sector.  The woes in the eurozone are weighing on many, both in terms of the visibility of order books and what it means for their investment plans.  But as the trade data show, new opportunities have not dried up.  Indeed, there are aslo plenty of companies still out there that are marching into the second half of the year with growth in their sights.  

Ahead of tomorrow's GDP release for the first quarter of 2012, what do the most recent economic indicators suggest about the state of the UK Economy?