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Insights into UK manufacturing

About Lee Hopley

I am EEF's Chief Economist 

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The climb back continues

Lee Hopley July 25, 2014 10:29

There is even more attention than usual on ONS's first estimate of UK GDP in Q2. Cutting straight to the chase the UK economy grew 0.8% in the three months to June and this takes us back ... finally... to where we were before the crisis hit. 

Chart of the year
GDP index, 2008q1 = 100
Source: ONS

The UK economy has now seen six consecutive quarters of growth and over this period real GDP has increased by 4.4%. Most sectors of the economy have been contributing to this expansion, with services up 4.4%, manufacturing up 3.5% and construction up 5.6% over this period. Ahead of today's release the IMF announced that it had revised up its expectation for full-year growth in the UK in 2014 to 3.2% - the fastest rate of growth forecast amongst developed economies.

Ground to be made up everywhere you look

Before we all give ourselves a Commonwealth medal for winning the global race, however, there are a couple of issues that are worth flagging. 

Obviously from our perspective is the weaker than expected quarter for manufacturing output. The sector expanded by a modest 0.2% in the three months to June, the fifth consecutive quarter of expansion but the weakest three-month period of growth we've seen since 2013q1. This was driven by fairly big falls in output in most sectors in May. Some of this was clearly unwound in June and a whole range of survey indicators suggest that this is not likely to be the start of a much weaker trend in the second half of 2014. However, this still leaves a pretty big gap (of some 8%) between 2008q1 and current manufacturing output levels.

Elsewhere, the run of growth across all sectors came to a halt in q2 with output falling in the construction sector and in agriculture. In contrast, services output increased by a robust 1% over the quarter. 

Manufacturing output
Index, 2008q1 = 100
Source: ONS

 

Secondly, while we're back to where we were before the financial crisis, think about where GDP might have been if the economy had been growing consistently over the past seven years -- that puts the level of catch up into perspective.

Finally, we are far from the first advanced economy to get back over the pre-recession line - many others, including the US about three years ago, managed it well before the UK.

So, policy makers can’t yet afford to take the summer off. We still have a hill to climb in building the right conditions for companies to invest in, and export from, the UK. This includes pressing ahead with measures to secure a more highly skilled workforce, accelerating improvements in access to finance and, working on the pipeline of new infrastructure projects.

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Why we're still talking about access to finance

Lee Hopley July 24, 2014 09:09

2000, 2002, 2011 and 2013?

This could be a fiendishly difficult question from a favourite quiz programme amongst EEF bloggers - Only Connect - to which the answer is the years in which reports looking at the state of competition in SME banking were published. The next year in this particular series looks like it will be 2016 if the Competition and Markets Authority (CMA) proceeds with a phase 2 investigation of the sector.

CMA concerns about concentration of BCA market

Following the Vickers report (2011) and the Parliamentary Commission on Banking Standards (2013) the CMA conducted another market study of Banking Services to small and medium-sized businesses. The review looked at core banking services for SMEs - business current accounts (BCAs), overdrafts and loans - and set out a number of conditions that one might expect to see in a well-functioning market, including SMEs having a broad choice of provider, products and services are customer focused, good levels of innovation, and new players easily entering the market and growing their market share.

In over 180 pages of evidence and analysis, the report concludes that these characteristics are not evident in the UK SME banking sector. This should not come as a surprise as this was broadly the conclusion that others have reached over the past decade. Rather the picture has consistently been one of mediocre satisfaction levels with banks but low levels of switching; a paucity of new entrants into the market, those new challengers remaining rather small in scale and persistent barriers to these entrants from the cost to establishing a (still important) branch network and the costs associated with gaining access to the payments system.

Some facts and figures

The CMA bolsters its arguments with a host of, now widely recognised, facts about the UK SME banking sector:

  • 85% of BCAs are provided by the four largest banks in England and Wales. Concentration levels are higher in Scotland and Nothern Ireland.
  • 4% of SMEs switched provider last year - a lower proportion than those changing their energy or telecomms supplier.
  • Between 10%-20% of SMEs say the service from their bank is poor, but 70% don't see much difference from other providers in the market and comparing prices of BCAs and loans is complex.

Is it all bad?

These stats are not encouraging, particularly as there has been relatively little movement on any of these challenges in recent years. This also doesn't consider what's been happening to the supply of finance since the financial crisis (not a consideration for the CMA in this phase of its review process).

But some things have been moving. We've seen some divestments from the major banks to establish new players in the market, there are greater efforts within government to improve the sharing of credit information, which should provide challengers with more information on potential SMEs customers and the British Business Bank is getting up and running with a range of solutions to boost the presence of challengers and provide more financing alternatives outside of mainstream banks.

So what next?

The incremental steps to facilitate more new entrants and get more churn in the market are fine and welcome, but it could take decades to see a step change in some of the statistics outlined above. Back in 2011 EEF said a clear and actionable response from government to the Vickers recommendations should be an urgent priority. Given the small steps we have seen since, further action on this front feels no less urgent.   

The CMA is not consulting on whether there should be an in-depth investigation into the markets for both personal and business current account and business loan markets and are inviting responses by 17th September (you can find more information here). 

The evidence from the phase 1 investigation would seem to put the balance in favour of further work in this area, if that is what's needed to adopt actions that would accelerate progress towards a more dynamic sector for businesses - not just to offer more choice today, but to ensure the very diverse community of SMEs we have in the UK can access a range of competitively priced financing solutions to support growth in the long run. We also need to ensure that the sector can support these businesses through the ups and the downs of the economic cycle. And with those points in mind a next-phase investigation should perhaps consider pricing in more detail and the extent to which government-routed financial interventions have operated through existing providers in recent years.

Ultimately this has been a longer road than many had hoped in the aftermath of the financial crisis, but we must stay focused on the outcomes of delivering a more dynamic and diverse financing landscape for investment and growth across UK SMEs. 

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Labour market still on a roll

Lee Hopley July 16, 2014 12:41

The UK's labour market data has ceased to surprise. Employment has been steadily climbing for the past year and was up 108,000 on the month. The latest statistics also show the unemployment rate hit 6.5% in May - down from 7.8% a year ago and the lowest since the beginning of 2009.

Unemployment rate
Source: National Statistics

Employment growth was seen across all age groups and in both full-time and part-time employment - although the former was stronger and average hours worked nudged a bit higher too. With the more up-to-date figures on the numbers claiming unemployment-related benefits dropping by a further 36,000 in June and the number of vacancies continuing to rise, for the next few months at least we should expect the employment data to be showing more of the same. 

Not so fast...

While the employment data is roaring ahead, pay across the economy is showing relatively little movement.... still. Weekly pay (excluding bonuses) rose by 0.7% in the past three months compared with a year ago and factoring in bonus pay brings that rate of increase down to a meagre 0.3% - either way, running a far bit below the rate of CPI, which measured 1.9% in June.

There are inevitable sector differences, with manufacturing continue to be one part of the economy with faster growth in earnings.

Average earnings growth
% change past three months on a year ago
Source: National Statistics
* Public sector exc financial services

Looking ahead on the pay front the data on overall earnings growth could look substantially worse next month due to significant growth in bonus payments 12 months ago, but these effects will drop out the following month, when earnings growth should come back to current levels.

Does this change anything?

From the MPC's perspective probably not. The employment data say raise rates, the wage numbers say hold off for now. It seems as though the Committee will need to see some concrete signs of productivity picking up and that feeding through to higher pay before they'll make their first move. And whether that comes before the year is out is yet to be seen.

 

EEF will be blogging on our own Pay Survey later this week   

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That was then.. this is now

Lee Hopley June 13, 2014 09:26

When the Governor of the Bank of England speaks you can read about it on the front page of most newspapers (whatever he says). Last night's Mansion House speech is no exception - and for good reason. The inclusion of a line pointing to the possibility of interest rate rises 'sooner than markets currently expect' is what has sparked the interest.

The dial has been gradually moving towards MPC action, almost as soon as the Bank set out its forward guidance some ten months ago. This was a necessary and balanced reaction to the surprisingly strong pick up in growth and in the labour market. 

A quick review of the Bank's messaging in recent Inflation Reports shows that we've moved from February's continuing warning of 'significant headwinds — both at home and from abroad' and spare capacity concentrated in the labour market meaning 'Bank Rate may need to remain at low levels for some time to come' to the view in May, which set out that when Bank Rate does start to go up, it would do so only gradually. Most recently, the May MPC minutes hinted that the debate inside the Committee was likely to start heating up in the months ahead given that there was now a 'variety of views on the appropriate path of monetary policy'.

As of last month, most forecasters were still expecting no rate hikes this year (see HMT survey here). Since those forecasts were made there has been little substantive change in the economic picture - recent trends of positive activity across the main economic sectors continues, inflation remains below target, wage growth is subdued and unemployment has edged down further. But as we highlighted in our Monthly Briefing things aren't normal - GDP per head is far below pre-crisis levels, export growth is struggling to recover and substantial public spending cuts are still to kick in - to name a few issues still facing the UK. 

This all leaves the decision in finely balanced territory for the time being. The minutes of the June MPC meeting should shed more light on which view is starting to win out - we'll be blogging on the key points, as usual, next Wednesday. However, in the meantime, the prospect of rate rises isn't too much of a concern for the manufacturers we've been speaking to recently. Some have limited borrowing and others (SMEs) have seen elevated spreads on lending which shouldn't be impacted significantly by modest small increases in Bank Rate. Perhaps more of an issue to some is the impact on Sterling, which notched up further gains following last night's speech.

      

 

Manufacturing - the growth story continues

Lee Hopley June 06, 2014 16:03

So far this year we're seen a great run of positive data about UK manufacturing. And our latest survey shows that run isn't about to run out of gas any time soon. EEF's Manufacturing Outlook report, in partnership with BDO contains another bumper crop of positive data about industry trading conditions.

Manufacturing 2014q2, the headlines:    

  • Output balances remain solidly positive, with a balance of 26% of manufacturing reporting rising production levels in the past three months.
  • UK demand supports orders growth over the quarter, but export balance comes in weaker than expected.
  • Short term confidence holds up, forward -looking output balance hit seven year high.
  • Exports expected to strengthen in the coming months.
  • A balance of 28% of manufacturers planning new investment and a balance of 23% report new hiring intentions.
  • Growth forecasts for manufacturing upgraded to 3.6% in 2014.

Output up, orders up

% balance of change in past three months
Source: EEF Business Trends Survey

Manufacturing activity remained robust this quarter, with a strong positive balance of +26% of companies reporting a higher level of production over the past three months, up from +22% in the first quarter of 2014. This marked the fifth successive positive quarterly balance and was in line with firms’ output expectations in our previous survey.

Manufacturers reported a fourth consecutive quarter of solid domestic demand, with a positive balance of +16% of companies noting an increase in UK orders over the past three months, an identical result to our previous survey. There was, however, a clear softening of overseas demand, with a balance of +9% of manufacturers reporting a rise in export orders this quarter, down from +16%.

Positive output balances across all sectors

% balance of change in output in past three months
Source: EEF Business Trends Survey

In line with expectations reported in last quarter’s survey, all sectors reported an increase in output in the last three months. Motor vehicles and rubber and plastics manufacturers reported the strongest sets of results, with balances of 43% and 36% of companies reporting an increase in output respectively. These were little changed from the previous quarter’s figures. There was notable softening in the output balances for the electrical equipment and electronics sectors compared with last quarter, but in both cases expectations for the next three months are firmly positive.

New investment planned

% balance of change in next three months
Source: EEF Business Trends Survey

One notable area of improving confidence is in companies’ cashflow position. Following a fairly stable picture on cashflow expectations between 2011 and 2013, cashflow balances have been steadily improving over the past year. A pick-up in sales, a downward drift in the cost of inputs and some recent tax changes are all likely to be contributing to the improving cashflow picture. Also encouraging is what this should mean for investment plans; historically the two series are closely linked in our survey, so confidence in future cashflow should also support commitments to new capital expenditure.

Forecasts revised up

% annual change in output
Source: EEF and Oxford Economics

The manufacturing sector had a strong start to 2014, growing by 1.4% in the first quarter of the year.With our Business Trends survey showing manufacturing activity remained robust this quarter, with manufacturers in all sectors recording positive output balances our forecasts for growth in 2014 have been revised up. We now expect the sector to expand by 3.6% compared with our forecast of 2.7% three months ago. We also expect broad-based growth, with output set to increase in eleven of the thirteen sectors we provide forecasts for.

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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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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Manufacturing growth accelerates across developed economies

Lee Hopley May 06, 2014 11:39

Last week we had a bonanza of positive manufacturing data for the UK - with growth in the first quarter up 1.3% and April's PMI signalled a strong start to Q2.

The UK is part of more widespread upswing of manufacturing activity across developed economies. Weather disruptions aside the US has seen a solid performance from it manufacturers on the back of rising consumer confidence and a pick up in building activity which has support growth for household goods, cars and construction equipment.

In Europe, 2014q1 brought the first set of positive PMIs across all the major economies since the beginning for 2011, and this broadening improvement across manufacturing in the region comes on the back of solid export demand. For a change, this sits on contrast to some emerging market indicators, where PMIs have been drifting south since the middle of last year.     

Encouraging news on the labour market front is the corresponding pick up in recruitment activity that is following the upturn in output and new order intake across Europe.  

What a difference a year makes
index of activity 50 = no change 
Source: Markit 

OECD predicts world trade pick up

In addition to the more upbeat assessment of developed economy prospects published today by the OECD, it is also pencilling in a strengthening of world trade over the course of this year and into 2015.

" There are some early signs that trade intensity may now be rising... This was helped by stronger demand in the major OECD economies, particularly for fixed investment and inventories. ...trade growth could pick up to just over 5.75% at an annualised rate by the latter half of 2014."

World trade growth, % year on year change 
Source OECD

Forecasts for EU manufacturing

Forecasts are pointing to manufacturing expansion across all the major European economies and the US this year - a turnaround from the very patchy 2013 picture.

At present the UK and the US look to be leading the pack.

Manufacturing output growth, % change on a year ago
Source: Oxford Economics and EEF

 

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Bouncebackability

Lee Hopley April 29, 2014 13:18

Following our preview yesterday, ONS published its first cut of GDP data this morning. The headlines will have surprised no one:

  • GDP grew by 0.8% in the first three months of the year, pushing output 3.1% higher than a year ago
  • Manufacturing growth accelerated to 1.3% over the quarter
  • The main declining sectors were agriculture and mining

GDP heads towards pre-recession peak ... finally

index 2010=100
Source: National Statistics

 

Broad based growth across sectors

% change on quarter
Source: National Statistics

 

Manufacturing grows at fastest pace since 2010q2

% change on quarter
Source: National Statistics

 

And a few more facts about that manufacturing number

  • Growth of 1.3% in q1 implies that output expanded by 0.5% in March - the fourth consecutive month of expansion
  • Output is still languishing some 7.7% below its pre-recession peak and even if growth continued at this pace (unlikely) it wouldn't be back there until the end of 2015
  • In a new move from ONS we've got some early indications of sub-sector growth. The top performers over the quarter were rubber and plastics and mechanical equipment. Sliding lower were pharma and electrical equipment. 

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The week in charts

Lee Hopley April 25, 2014 11:16

Not the busiest week for new data releases but there were a couple of notable stats events this week.  Here's a quick round up of what you might have missed:

1. Good news on UK manufacturing competitiveness

New research from the Boston Consulting Group paints UK manufacturing competitiveness in a pretty positive light. Of the top ten global exporting economies the UK's cost competitiveness comes in at number four.

Competitiveness index rankings
Source: Boston Consulting Group

The index is based on movements in labour costs, exchange rates, energy costs and productivity over the past decade. The Group note that the UK has, on average, seen relative stability on the main variables. However, this is likely to conceal some fairly big swings - particularly in productivity and the exchange rate - either side of the 2008/09 recession.

Its research also looks at how some key emerging economies have been performing and concludes that the competitiveness of the BRIC economies and part of Central and Eastern Europe is coming under quite a bit of pressure, with rising wage rates a major culprit in some regions. This trend has been linked to the reshoring phenomenon in parts of the developed world. EEF's own research supports that view - to a degree. In the past three years one in six manufacturers have reshored activity back to the UK, but rising costs elsewhere are only part of the story.

As encouraging as the picture from BCG is, there are other factors baring down on the attractiveness of the UK as a destination for manufacturing. Sustained increases in investment by manufacturers in the UK will need on-going commitments on competitiveness in areas such as energy costs, and also on wider policies that influence productivity such as the skills landscape, support for innovation and the tax environment for investment in modern machinery.

2. Not much news on lending

And speaking of investment in the UK, the latest Bank of England Trends in Lending Report shows more of the same on business lending.

Net lending £bn
Source: Bank of England

Net lending to SMEs has been negative since the financial crisis, this trend continued through 2013, but the pace of contraction has been easing. The more negative trends in net lending for larger businesses will reflect the greater range of alternative financing sources available to them.

We should expect that more confidence amongst SMEs, the refocusing of Funding for Lending on businesses and lenders' expectations of improving avaibility will push net lending into positive territory in 2014 - shouldn't we?? 

3. Eurozone manufacturing off the critical list

Flash PMIs from Europe earlier this week brought another reason to be cheerful about the region and the prospects for UK exporters. The eurozone manufacturing sector has been posting pretty healthy activity readings since the start of the year and the early indications are that output and orders continued to grow, supporting stronger hiring intentions.

Manufacturing activity, 50 = no change
Source: Markit

 

 

The week ahead

Next week brings some more news on the UK with the 1st estimate of manufacturing and GDP growth in Q1, the manufacturing PMI for April and Consumer confidence.

We'll be kicking off the week with our expectations on those Q1 estimates.

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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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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.

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