Manufacturing heading for toughest conditions for two decades

Publishing its fourth quarter business trends survey and economic forecast for 2009, together with Grant Thornton, EEF warns that despite the improved performance of manufacturing in recent years, the sector is now going through a significant and sustained downturn. In response, EEF is calling for a further full point cut in interest rates by the Bank of England at its meeting this week.

Commenting, EEF Chief Economist, Steve Radley, said:

"Manufacturers have made substantial progress in recent years in improving their performance but the next twelve months are set to be some of the most difficult in two decades. What marks this downturn out from others is the alarming rate at which conditions have deteriorated through the autumn due to the problems in the financial markets. It is now imperative that government and the Bank of England continue to pull on every lever at their disposal."

Key results:

In terms of output, after 21 quarters of positive numbers, the balance fell to -11% from +15% in the previous three months. Similarly, the orders balance fell to the lowest since 2005q3.

The most marked decline was in the export orders balance as it dropped to -10% from +18% last quarter, reflecting the downturn in the world economy and the eurozone in particular. This was the first negative export orders balance in more than three years. The domestic orders balance plunged to -26% - the lowest since 2001q4.

Weaker activity was widespread across all sectors. Basic metals and motor vehicles have been hardest hit with output balances at -26% and -37% respectively, but the other transport sector showing the most marked decline from the previous quarter. With the exception of electronics, firms in all other sectors expect a further deterioration in the next three months.

All nine regions reported a slowdown in orders and only one region, the South West, posted a positive output balance. The worse affected region was the West Midlands, reflecting the weakness in the automotive sector, where a balance of 30% of companies reported a fall in output in the past three months. A deterioration in orders was experienced across all regions with London and the South East and Yorkshire and Humberside reporting the weakest prospects. Looking to the next three months the outlook is more pessimistic across all regions with the exception of the South West.

As might be expected the slowdown is now having a significant impact on employment and investment intentions. The pace of job losses accelerated in the last three months and were widespread across all regions. The losses were most significant in basic metals and motor vehicles sectors. Weaker order books, pressure on margins and cashflow problems led to investment intentions falling to their lowest in seven years. The problem was most acute for small firms, reflecting the difficulty in obtaining and, the increased cost of, finance.

Unsurprisingly, given the sharp slowdown seen in the past three months and the uncertainty surrounding the economic slowdown, manufacturers are extremely pessimistic about the next quarter with the balances on output and orders to falling to the lowest since both series began eight years ago.

Bob Hale, Head of Grant Thornton's Manufacturing Group, commented:

"The quarterly survey indicates that the positive progress made by the sector over the last few years has been destroyed almost overnight by the catastrophic effect of the recent turmoil in the financial markets. The sector needs immediate and positive help from the Government and the Bank of England to ensure the release of funding for investment and development, and also for further help in interest rate cuts and tax incentives. Without this help the sector faces a very bleak outlook for 2009."

The survey was conducted between October 30 and November 19 with 807 companies responding. The results presented cover the full range of engineering sectors – metals, metal products, mechanical engineering, electronics, electrical engineering, motor vehicles and other transport equipment.