EEF blog

Insights into UK manufacturing

About Lee Hopley

I am EEF's Chief Economist 

RSS feed for Lee Hopleysubscribe to my RSS feed to keep up-to-date with my posts

The only way is up

Lee Hopley April 16, 2014 16:00

...according to economic forecasters looking at the UK (not the platinum haired songstress from the 1980s). Last week the IMF caught up in its Spring forecasting round, taking a more optimistic view of the UK's outlook and revising its growth projections up to 2.9% in 2014 and 2.5% in 2015 - a shade higher than the median independent forecast reported by HM Treasury yesterday (2.8%).

Key IMF highlights 

  • Growth has rebounded more strongly than anticipated on easier credit conditions and increased confidence.
  • Unemployment is forecast to fall to 6.9% in 2014 (tho it got there in February according to today's data). Inflation outlook is stable this year and next.
  • The recovery has been unbalanced, with business investment and exports still disappointing.
  • The policy mix is not too hot and not too cold - Monetary policy should stay accommodative, and recent modifications by the Bank of England to the forward-guidance framework were welcomed. Similarly, the government’s efforts to raise capital spending while staying within the medium-term fiscal envelope were seen as helpful in bolstering the recovery and for long-term growth.

Elsewhere, the independent forecasters surveyed by HMT in the past month appear to be a bit more upbeat (on average) on rebalancing, with more optimistic forecasts for investment, exports and manufacturing output. 

Current UK GDP forecasts - 2014
Source: HM Treasury and IMF

Is the only way up?

Independent forecasts (this would include EEF's) certainly suggest that the UK is in for a pretty solid year of growth. But is up the only direction for forecast revisions? It would seem that the number of 'ifs' has diminished this year.  Indeed, data releases this week on inflation and the labour market will support a more optimistic view of consumption with wage growth picking up, inflation drifting down and unemployment dropping below 7%. And fewer uncertainties (plus a bit more tax incentive action) should give rise to more investment coming through from businesses this year.     

Upward revisions to the economic outlook don't yet extend beyond the end of this year, with the Treasury's survey of forecasters showing that sentiment about 2015 hasn't shifted. EEF will publish its next foreast update in June. 

P.S. A few manufacturing facts from the labour market stats

  • Manufacturing workforce jobs were up 1.8% on a year ago.
  • There were 43,000 vacancies in the sector in the first three months of the year.
  • Average earnings, excluding bonuses etc., rose 2.8% in the three months to February compared with a year ago.


45 days and counting...

Lee Hopley April 07, 2014 07:33

The UK's relationship with the European Union remains a hot media topic, not least because of the televised Clegg/Farage debates over the last few weeks. All in all press coverage and debate have generated a lot of heat but not much light on the subject.

What do we want? A better debate

But manufacturers will be hoping this changes in the next 45 days as the UK (and the rest of the EU) in the run up to the European Parliamentary elections. We've regularly blogged about manufacturers' views on the EU - companies want to stay in; they want to see a greater focus on growth and they want to hear a much higher standard of debate about the EU's future.

Today EEF is setting out its prospectus for the next Parliament focusing on the next wave of policies to support growth and competitiveness in the region and the structural evolution necessary to deliver effective and efficient policy making across the bloc. Importantly, the manifesto issues a call for a more positive debate about the UK's role in Europe and more clarity around how the UK's political representatives would seek to evolve its priorities and institutions.

Here's our top 5 asks:

  1. Open up trade and investment opportunities with ambitious trade deals while maintaining a level playing field by fighting against protectionist laws and practices.
  2. Maintain a competitive cost base across the EU with a smarter approach to Health and Safety regulation, limiting the complexity of REACH and delivering emissions reductions cost effectively.
  3. Prioritise investment in innovate to support the development of the technologies and sectors which can support growth and collaboration.
  4. Introduce a powerful 'Red tape Taskforce' which adopts a one-in, one-out approach to regulation; produces an annual statement of regulation costs and oversees a competitiveness test on new laws. 
  5. Streamline the number of directorates and encourage clustering where there is policy-making overlap.

When do we want it? Before the electorate heads to the polls 

At the last European Parliament elections in 2009 fewer than 35% of voters turned out - the 7th lowest in the EU. Many representatives from the business community - from financial services to the car industry- have spoken out about the importance of the UK staying in the EU. Over the next six weeks we need to hear more about priorities to support growth and jobs in the UK and across the EU from all parts of the political spectrum.

"We strongly support Britain’s continued membership of the EU. The Commission and the other EU institutions must now work tirelessly to support business and industry and, promote economic growth."  Terry Scuoler, EEF CEO


Credit conditions for business - what's new?

Lee Hopley April 03, 2014 10:53

The Bank of England's Credit Conditions survey, published today, tells us not much has changed for smaller businesses over the quarter, but there were sustained improvements for larger corporates.

Corporate credit availability was reported to have increased again in 2014q1

The increase in credit to small businesses was modest and no change was reported in availability for medium-sized companies

Higher demand and lower spreads on lending were notable cross larger corporates

No change in spreads on lending for small business over the quarter 

Corporate credit availability continues to edge up
% balance of change

Source: Bank of England Credit Conditions Survey and EEF Credit Conditions Survey

The Bank's Survey reports a positive balance on availabilty for business, a trend also seen in EEF's recent Credit Conditions Surveys.

For manufacturers overall there has been a clear improvement in the lending environment has been picking up since the end of 2012. But both our survey and the Bank's show that smaller companies are benefiting less than larger corporates.

It's the economy, obvs
% balance - factors contributing to credit availability


Source: Bank of England

Key reasons for a pick-up in the availability of finance are the improving economic outlook, which should also be a factor in lenders upping the amount of credit available in the next quarter. Alongside this lenders are also reported an shift in risk appetite and efforts to gain market share, which have also contributed to greater finance available.

On the demand side, positive trends were noted in M&A activity, new capital investment and commercial real estate purchases.

What now?

Most of the evidence on credit conditions over the past year has been moving in a more positive direction, with a brighter demand outlook support more demand; progress in banks' balance sheet repair and interventions such as FLS helping out on the supply of finance.

Not job done though. There are some issues that remain unresolved, including getting a grip on the cohort of discouraged borrowers (which we have flagged up before), getting the overall cost of finance for small companies down and ensuring companies have access to a broad spectrum of financing options within and outside the banks.


January - March 2014: What's been happening?

Lee Hopley March 31, 2014 11:39

The first quarter of the year ends here. Here's quick round up of the economic ups and downs so far this year and a look ahead at what sorts of numbers we are expecting to see in the coming weeks.


The index of production data for January showed a 0.4% increase in manufacturing output on the month, with growth seen across the majority of sub-sectors. The manufacturing PMI index also posted strong data for January and February.

Industry only surveys covering the quarter as a whole all signalled upwards trends in output and orders, including EEF's Business Trends Survey, which also reported a strong uptick in export demand.

2014Q1 FORECAST: Manufacturing growth of 0.8%

Elsewhere in the economy

PMI indices covering services and construction have also been running at above average levels.

Official data on consumption continues to look pretty promising too as retail sales volumes increased quite strongly in February after edging down in January. Consumer confidence has been picking up and the squeeze on incomes is also starting to let up as inflation eases.

However, will we see more positive contributions from investment and net trade following the boost from both in the final months of 2014. The outlook for investment should be positive, building on the growth posted in 2013 - intentions as measured in surveys have strengthened and lending conditions are somewhat easier for smaller businesses. Prospects for net trade look less certain. A more stable Europe will help exports hold up and surveys have been a bit more upbeat about incoming orders, however this may not be enough to outpace imports. 

2014Q1 FORECAST: GDP growth of 0.6%

2014Q1 FORECAST: Business investment growth of 1.6%


CPI inflation has fallen in each of the last five consecutive months and in February it stood at a four year low of 1.7%. Lower petrol prices have been a contributing factor in falling inflation, which should also spur a further fall in March. Beyond that the outlook for prices looks fairly benign with a stronger GBP holding down import prices and little sign of upward pressure coming through from commodity prices.

March 2014 FORECAST: CPI inflation to drop to 1.5%



3 things you may have missed this week.....

Lee Hopley March 21, 2014 09:53

With the Budget being the focus for many this week, some other bits of news may have escaped the radar.  Here's a quick rundown on three things you may have missed.

Labour market statistics

Unemployment down, earnings up

  • The labour market improved again, with employment rising to 30.19mn in the three months to January. However, this was due to more self-employed people; the number of employees fell over the period.
  • Unemployment fell by 63,000 over the three-month period, and the ILO unemployment rate remains at 7.2%.
  • Average earnings growth across the whole economy increased slightly to 1.4% in the three months to January, from 1.2% in the three months to December. In manufacturing, this figure was markedly stronger, with average weekly earnings growth of 3.2%.  

MPC Minutes

With unemployment still above 7% and no breach of inflation knockouts the decision to keep rates and asset purchases on hold was unanimous

  • International outlook: A mixed picture with modest recovery in the eurozone, weather-related weaker US data and more stable financial conditions in emerging markets. Political tensions in Ukraine were of concern; even though UK linkages are limited effects could come from a general rise in risk premia and increased commodity prices.
  • UK trends: Business surveys point to robust activity and data revisions to business investment had eased concerns that growth was coming solely from households and house building. The refocusing of Funding for Lending towards businesses was expected to further support capital spending over the next year. The Bank expects UK GDP to increase by 0.9% in 2014q1.
  • Prices: Inflation fell to 1.9% in January. The MPC expects domestic inflation pressure to pick up a bit as spare capacity lessens and wage growth picks up. This should be offset by waning external price pressures keeping CPI inflation close to target. There are numerous risks to this outlook, including sterling and tensions in Ukraine.
  • Productivity: Latest ONS data point to a gradual pick up in productivity since its 2012 trough. But question remain about whether this will be sustained - employment growth had slowed and a growth in self-employment has been contributing to the improving labour market conditions which could imply that some individuals are unemployed. On the other side, young people are disproportionately represented among the unemployed, and were they to gain work would add less to productivity than those currently employed.
  • The decision: Unemployment remains above 7% and the Committee judged that neither price stability knockouts had been breached. The Committee's August 2013 policy guidance remains in place and no member voted to change Bank Rate or the stock of asset purchases.

Public Finances

Borrowing £4.4bn lower than a year ago and on track for OBR 2013/14 forecast of £107.8bn

  • The UK government borrowed a total of £99.3bn over the first eleven months of the 2013/14 financial year (which runs from April 2013-March 2014). This was £4.4bn lower than the same period a year earlier.
  • However, for February 2014 alone the borrowing data were slightly weaker than a year earlier, as they had also been in January. This was despite a 54% year-on-year rise in stamp duties in February, reflecting the recent surge in activity and prices in parts of the housing market. 
  • The fiscal deficit remains broadly on track to meet the OBR's latest target for the full 2013/14 financial year of £107.8bn, equivalent to 6.6% of GDP.
  • As the chancellor, George Osborne, was keen to stress in this week’s budget, the headline level of borrowing has fallen steadily from a peak of £157bn (11% of GDP) in 2009/10.
  • However, the UK public finances remain very weak. Among advanced economies, only Japan is forecast to run a larger fiscal deficit (as a share of GDP) than the UK this year.
  • As a result, the level of government debt is continuing to rise steadily. Public-sector net debt totalled £1.25trn at end-February 2014, equivalent to 74.7% of GDP. The OBR’s latest forecasts have public debt peaking (as a share of GDP) at 78.7% in the 2015/16 financial year. This compares with a pre-crisis debt stock of 36% in 2006/07.


What's the deal with investment allowances?

Lee Hopley March 20, 2014 12:04

In yesterday's Budget the Chancellor announced an increase AND an extension to the Annual Investment Allowance.

From April 1 to the end of 2015 a company investing in qualifying plant and machinery can immediately write off the first £500,000 of investment against corporate tax

The move was billed as a measure that would help all businesses invest. And at a cost of £2 billion this was intended to send a strong message that the government is serious about investing. And so it should be. Business investment ticked up in 2013, but still stands some 20% below its pre-recession peak. Across manufacturing, delayed investment spending will also be impacting on productivity and the ability for the supply chain to respond to a sustained improvement in demand.

What difference does tax system make to investment?

We've blogged on the link between tax and investment in the past - see here and here. But here's a quick summary of why the tax system matters for investment:

  • As a piece of machinery has a useful economic life spanning multiple years, the tax system has to reflect this ongoing use. This means that (in normal circumstances) it doesn't make sense to simply write off the entire cost of a machine in the year of purchase, but neither should companies investments be funded out of post-tax profits - this is not how other inputs are accounted for.
  • The design of the tax regime to account for these assets matters - particuarly for SMEs.
  • Higher capital allowances boost cashflow therefore boosting companies’ ability to invest.
  • The link between cashflow and investment is strongest when there are constraints in capital markets and firms are struggling to access finance.

Wasn't £250k enough?

For a lot of businesses it was. Manufacturing is, however, more capital intensive and a higher proportion of investment is accounted for by mid-size businesses - a group that is generally investing in excess of £250,000 per year.

So, as investment intentions are on the rise a bigger incentive from the allowance is needed to have an impact on firms accounting for a higher share of overall manufacturing investment. To illustrate we've pulled some old ONS data from 2010 on levels of investment by different sizes of firms and we estimate that the higher £500k investment allowance should cover three-quarters of investment by SMEs, compared with around 60% of investment covered under the £250k allowance.

So we're all good now?

Yes, this is a good move. The OBR forecast that the change will result in around £1billion of investment being pulled forward from 2016 and 2017 to 2014-15.

But what about after that? Manufacturing is not just about the next investment, but sucessive rounds of investment in product development, technology and productivity. If the increased investment allowance expires at the end of 2015, the UK will return to having a relatively uncompetitive regime for investment in plant and machinery - in contrast to the rate of corporation tax, or areas such as the R&D tax credit.

I say if, because the main rate of capital allowances and the level of investment allowances have been subject to so much change in recent years - as shown in the table below.

A temporary boost to investment allowances is welcome, but an economy in want of a lot more investment needs a more competitive and predictable tax regime over the long term. With a generous increase in place, a review on what a future system needs to look like should follow.


Manufacturing outlook - on the up again

Lee Hopley March 17, 2014 07:26

2014 has started strongly for manufacturers, according to our quarterly survey with BDO.


  • Output and orders balances firmly positive over the past three months
  • Export orders pick up at the start of 2014
  • Expectations for orders in the next quarter to strengthen further
  • Increased activity will lead to a pick-up in hiring and investment plans
  • Manufacturing to grow 2.7% this year

Positive Q1 for output and orders

A balance of 22% of manufacturers reporting rising output in the past three months, in line with the previous quarter's expectations. The positive trend was noted across all sectors with particularly strong output balances seen in motor vehicles and electronics. 

The outlook for the next three months is stronger still with a balance of 29% of companies planning for an expansion in output levels and a balance of 37% expecting to see a further pick-up in orders - a record high in our survey.

% balance of change
Source: EEF Business Trends Survey

Export orders turn a corner

Over the past year the balance of responses on UK orders has been stronger than those for exports. The relative weakness in new export orders has been reflected in the disappointing official trade data. In the past three months export orders have improved with the balance of responses ticking up to 16%, from 7% last quarter and the highest since 2011q3.

Looking to the next quarter, manufacturers are expecting a healthy increase in their order pipeline. The balance of companies planning for increased UK and export orders surged to 30% and 33% respectively - another set of record high indicators in this quarter's survey.

% balance of change in orders
Source: EEF Business Trends Survey

Employment and investment set to grow

In response to improving outlook for production manufacturers have been recruiting and investment plans are being revised up for the year ahead. Over the past three months a balance of 30% of manufacturers have taken on new employees and a net balance of 31% is planning to increase headcount further in the coming quarter - another survey high.

The final record indicator is investment intentions - a balance of 34% expect to increase investment levels, with a consistently positive picture across all firm sizes.

% balance of change
Source: EEF Business Trends Survey

Manufacturing to grow 2.7% in 2014

Our forecast for manufacturing grow is unchanged at 2.7% this year following by 2.1% in 2015. Most sectors within manufacturing should expand this year with other transport, basic metals and mechanical equipment amongst the strongest performers.

We have nudged up our expectations for GDP growth this year to 2.6%.

% annual change in output
Source: EEF and Oxford Economics


Getting to know discouraged borrowers

Lee Hopley March 13, 2014 11:06

When it comes to access to finance, there are some unresolved issues in the post-financial crisis period - which measure of lending (net or gross) is more useful? Are banks lending to small business? Will demand simply pick up with the recovery? What does a normal lending environment look like now? Everyone has a view - including EEF Economists - see our views on demand, application success rates and where we go from here.

Today the Enterprise Research Council produced some in-depth research on part of the demand puzzle - companies that have a need for finance, but act as they believe they will be unsuccessful - 'discouraged borrowers'.

The numbers

  • Around 173,000 small businesses could be classified as discouraged borrowers
  • This group is around 4% of firms
  • Attacking the causes of discouragement could result in an additional 77,000 successful finance applicants.

The numbers matter here - particularly when thinking about a policy response. While there is, for example, a lot of focus (rightly) on companies with high growth potential that need equity or patient capital, these are smaller in number than those identified by the research as discouraged.

Will growth drive the discouraged back to banks?

To answer that the research points to some of the hurdles small business face in seeking new finance.

Determinants of perceived loan applications costs - impacts on perceived success probability thresholds in percentage points
Source: SME Finance Monitor analysis

This isn't quite a complicated as it seems.  Essentially, the higher the score the larger the perceived barrier to borrowing among small companies. So, T&Cs and collateral requirements are seen as a deterrent to borrowing by small companies; more so than the economic climate (or as is shown elsewhere in the research any negative media reporting on banks). Qualitative analysis also points to prior experience with finance providers impacting on appetite to borrow.

The basis for discouragement is often the refusal of a loan or overdraft application in the past. is as much the way the refusal is delivered as the refusal itself.

The factors that work in the other direction are more pro-active approaches from banks and awareness that there is the option to appeal lending decisions through the Appeals process.

What can be done?

The ERC makes a number of recommendations, including.

  1. More consistent implementation of the Lending Code and Lending Principles
  2. Further awareness raising efforts of the Appeals Process and of the Lending Code/Principles
  3. A working group to explore how businesses can improve their credit health and knowledge of alternative finance providers

All sensible. But accountability is missing. This is where government could helpfully act to set out what a good level of awareness of these initiatives should look like and the expected impact on this group of discouraged borrowers.


Backing Britain ... the reshoring story continues

Lee Hopley March 03, 2014 10:26

Today we published a new report on manufacturing in the UK, in partnership with Squire Sanders. The research looks at the factors that make UK manufacturers competitive; what's great about making things in the UK and at one particular type of investment decision - switching production or suppliers from low labour cost economies back to Britain....or reshoring for short.

There has been a significant increase in public interest in the reshoring phenomenon over the past couple of years. But how significant is the trend itself? 

Here's five things you need to know about reshoring...

  • Quality and customer service are the order of the day for UK manufacturers

In today’s manufacturing sector, an emphasis on quality and brand reputation remains key. In identifying the three main areas of competitive advantage, product quality was highlighted by almost half of all respondents in our survey.

Customer service and maintaining a strong record of on-time delivery to customers are identified by at least one-third of surveyed companies as the main areas in which they compete. These trends have come to the fore in recent years, when a climate of uncertainty and reduced order visibility have meant that manufacturers who could move quickly and deliver on commitment were well placed to thrive.


Source: EEF/GfK Make it in Britain Survey

  • Aspects of the UK business environment are strongly supportive of these competitiveness strategies

Some 84% of survey respondents emphasise an advantage to their business brand and reputation from the production of UK-made goods, the quality of which is held in high regard around the world.

And having worked hard to establish high-value brands in the market, companies are understandably keen to protect their intellectual property. In an environment of widely differing levels of regulatory compliance around the world, more than two-thirds of manufacturers in our survey highlight the benefit of production in Britain in terms of reducing intellectual property risk.

Access to the right suppliers is another critical factor, especially among smaller firms. More than four-fifths of companies in our survey identify the quality of suppliers as an advantage to being based in the UK.


Source: EEF/GFK Make it in Britain Survey

  • One in six companies has reshored production in the past three years

We are seeing a movement of production that was previously done in low-cost economies moving back to or closer to UK markets. EEF’s survey shows that in the past three years one in six respondents have reshored production in house, and the same proportion has switched to a UK supplier from a low-cost country.

Reshoring is not limited to any specific size or characteristic of company, and we are seeing all sizes of firms from all sectors moving production and suppliers closer to home.

  • Quality and delivery times are driving reshoring decisions

Among the top reasons for reshoring amongst all sizes of firms is greater certainty around delivery times and shorter delivery times. According to our survey, a third of companies are bringing production back to the UK for reasons of delivery certainty and 30% to increase speed of delivery.

A guarantee of quality is critical for a large minority of companies who report this as contributing to their competitive advantage in the market. Almost half of manufacturers believe that the quality of goods sourced from lower-labour-cost economies is getting better, with larger companies seemingly better able to secure quality improvements, but confidence that overseas operators will supply to the required specifications is not sufficient for many. Quality issues have been among the top reasons for 35% of reshorers.

Source: EEF/GfK Make it in Britain Survey

  • Gains in profitability and employment - especially in the supply chain

For a lot of companies the reshoring decision is strategic - improving quality and service and minimising supply chain risks. But there are bottom line benefits too.

Nearly three in five companies who have reshored in the past three years report profits increasing as a direct result, and just under a third say that profits have stayed the same. The increases in both turnover and profitability are most likely to be moderate – an increase of up to 10%; however, some firms do see increases above that proportion.

It is not just companies who have made the decision to reshore who have realised the benefits. Companies in the supply chain who have received orders that were previously sourced from low-cost overseas locations also report benefits. Of companies who report increases in profitability or turnover, the majority say it is moderate of up to 10%.

Over half of companies report their employee numbers rising as a result of winning reshored work, but again this is most likely to be moderate, with the largest proportion of companies saying gains of between 1% and 5%.


SME Finance Monitor - Growth, Finance, the Future

Lee Hopley February 27, 2014 10:52

Our blog yesterday showed the economy is picking up. The upturn has become a bit more broad based across sectors and expenditure components, with trade and investment both positively contributing to growth.

There is inevitably the question of whether better balanced growth is here to stay. For investment, the outlook for lending will be a determinant of the future strength of recovery, particularly for SMEs. The recent Inflation Report shows that the Bank of England continues to keep a close eye on how credit conditions are evolving…

Changes in credit conditions have been one of the main headwinds affecting the UK recovery and their assumed evolution is a key determinant of the MPC’s projections for
output and inflation.

The Report notes that there has been improved availability for companies, but loan rates for small companies have remained unchanged. In contrast mortgage availability has seen a marked rise.

Over the next couple of weeks we’ll get more of the picture on business lending – the Bank’s Funding for Lending statistics will be released on Monday and EEF’s Credit Conditions Survey will be released the following week. But first off we have the latest info from the SME Finance Monitor.

Profits and plans to grow

The Monitor first looks at the recent performance of the SME sector and the good news is that a higher proportion are making a profit, almost half have plans to grow in the next twelve months and there is a slight increase (from a low base) in the percentage of SMEs planning to grow by selling to new markets. Another notable finding is that fewer companies now see the general economic climate as an impediment to growth.

Recent credit applications

The outlook is brightening, but applications for finance have not yet followed. Over the past couple of years there has been a downward drift in applications for new and renewed facilities.

Source: SME Finance Monitor

Success rates

The final outcomes of those applications has, however, been pretty stable over the period. When overdrafts, loans, new and renewed are taked together, around 70% of SMEs end the process with a facility.

Source: SME Finance Monitor

The future

Looking ahead, the better economic outlook hasn't had a material impact on the appetite for new finance. The proportion of SMEs likely to apply for finance in the next three months is steady at 15%.

So it's not yet clear that either applications or success rates will simply turn a corner now the economic outlook is starting to brighten. In addition, the survey also shows that there is still the challenge of raising awareness about the various initiatives to support SME lending conditions, such as the Appeals process, not to mention the structural problems of an overly concentrated market for SMEs with still limited financing alternatives outside the banks. At the budget we need to see continued action on all these fronts to ensure banks are accountable for their customer service commitments and another round of actions to reduce barriers to new entrants and create a more dynamic environment for SME finance.


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.

We welcome and encourage comments, but we reserve the right to remove any that are offensive or irrelevant. We are not responsible for the content of external internet sites.

About EEF

EEF helps manufacturing businesses evolve and compete.  We provide business services that make them more efficient and management intelligence that helps them plan.  Our work with government encourages policies that make it easy for them to operate, innovate and grow.

Find out more at