Britain’s manufacturers have started 2006 on a positive note with output and orders rebounding strongly from the end of last year, according to a leading business survey published today.
The first quarter 2006 engineering outlook survey, published by EEF, the manufacturers’ organisation and RSM Robson Rhodes suggests that the weakness in manufacturing in 2005 was temporary and that growth prospects should continue to improve during the course of this year.
Orders and output recovered to their strongest levels since the end of 2004 whilst the expansion in export orders continued, with exports to EU markets being especially positive. This suggests that upbeat figures from Germany may finally be translating into improved orders for UK manufacturers.
Firms also reported improved confidence about the next three months, with forward looking indicators rising to their highest level for two years. This brighter outlook is one factor spurring firms to increase their investment plans which have risen to the highest level for eight years, though rising costs are also generating a renewed focus on raising productivity.
However, EEF sounded a note of caution as the survey shows that cost pressures remain intense with firms struggling to pass increases on to customers.
Commenting on the survey, EEF Chief Economist, Steve Radley, said:
“Stronger growth in the eurozone and a pick up in home markets have seen manufacturing bounce back strongly at the start of the year. The improved outlook is also generating an upturn in investment.
“However, rising costs mean that the squeeze on margins is tightening. The government has an important role to play in avoiding extra cost burdens in the coming Budget and addressing rising energy prices.”
Key findings:
- Output and orders rebound strongly
- Growth to be maintained in next three months
- Optimism supports investment pick up
- Job losses ease to a slower pace
- No let up in cost pressures
- Growth in engineering and manufacturing to be 1.8% and 0.4% respectively in 2006
Growth is concentrated in the higher technology areas with electronics and other transport equipment (which includes aerospace) the best performing sectors. Whilst motor vehicles continues to report falling output, the picture is much improved on previous quarters and the sector expects an improving performance in the coming months.
The regional picture reflected the sector pattern. The South West was the best performing region on the back of strong growth in aerospace output, whilst the electronics industry is powering growth in Scotland. In contrast, the North East and the West Midlands continue to feel the impact of the weakness of the basic metals and motor vehicles sectors respectively.
Whilst job cuts have continued in the last three months, these have eased. This suggests that the more positive picture going forward is encouraging companies to hold on to their workforce, whilst the moderate growth in pay settlements at the start of the year has helped job retention.
Investment plans are also showing signs of improving, with the balance of companies expecting to increase investment the highest since the first quarter of 1998. However, amongst smaller companies there was a different picture, suggesting the squeeze on margins is holding back their efforts to increase investment.
Looking forward, firms are optimistic about prospects for the next quarter with the positive indicators from the eurozone accounting for at least some improvement in confidence. In addition, all sectors are positive about the coming quarter for the first time in a year.
Bob Hale, chairman of RSM Robson Rhodes’ National Manufacturing and Technology Group, comments:
“It is heartening to see a return to confidence within the sector. With upturns in output and orders set to increase over the next quarter the growth forecast for both engineering and manufacturing over the next two years are good. In addition, more companies are planning to invest over the coming 12 months, a clear sign of increased optimism.
“However, downward pressures on margins remain, with most sectors still experiencing cost increases which cannot be reflected in increased selling prices.”