While output and order balances are weaker than in the last quarter of 2007, they remain above their long-term average. Investment intentions also remain strong and were up on the previous quarter, while more firms said they are expanding employment than cutting jobs and expect this to continue.
Commenting, EEF Chief Economist, Steve Radley said:
“Despite ongoing economic uncertainty and rising costs, manufacturers recorded another quarter of growth and remain confident about their immediate prospects. Companies are also maintaining their investment plans and taking on workers. It is vital that the forthcoming Budget does not make it more difficult for manufacturers to maintain their resilience by adding to the cost pressures that they face.”
Key findings:
· Output and orders remain above the long term average
· Some weakening in domestic demand but export orders holding up
· Firms positive on employment and investment
· All sectors confident about next three months
· Growth set to slow this year
Our survey shows that both output and orders recorded their tenth consecutive quarter of growth with both balances remaining in double figures since 2006q1. Although the balance of responses on output eased to +15%, in the first three months of the year it was still above the average for the last five years for output balances. Similarly responses on order books were still strong – with14% of respondents reporting that orders had risen – but were down on the previous quarter’s figure of 21%.
Continuing previous trends, export markets have driven growth ahead of domestic orders with the balance on export orders significantly ahead of domestic at+13% and+2% respectively.
In the previous three quarters, positive output balances were recorded in all sectors, pointing to fairly balanced growth across manufacturing. However, the sector picture was more mixed in the latest survey. This suggests that electrical equipment will see a particularly sharp slowdown in output in the first quarter of this year. In addition the electronics output balance was negative for the first time in a year. In contrast, the transport sectors reported more buoyant output growth over the past quarter.
In terms of pricing power and margins pressure, the picture is again little changed from previous quarters. The official statistics have pointed to an increase in factory gate prices but our survey suggests that pricing intentions remain relatively muted.
The outlook for the next three months remains positive. Forward-looking output and orders balances were little changed from the previous quarter. Furthermore, all sectors are relatively upbeat about prospects in the next three months. This is also supported by strong, positive investment intentions across the sector and plans by some firms to increase jobs. This suggests that while there may be some uncertainty about the near-term, companies are feeling confident enough to continue invest.
Despite the strong positive balances reported in the current survey and throughout last year,, the official statistics suggest the sector’s performance was rather weaker. In 2007, engineering grew by just 0.8% and manufacturing by 0.6%. The official data also points to a contraction in both engineering and manufacturing in the final three months of last year, in contrast to more positive private sector survey evidence. We forecast engineering to grow by 0.2% in 2008, with growth returning in 2009. Manufacturing is expected to fare somewhat better, growing by 0.5% this year and 1% next.
Bob Hale, Head of Manufacturing at Grant Thornton, commented:
"While manufacturing is this decade's true economic comeback kid, the sector is not completely immune to the inflationary pressures and weakening consumer spending that are already impacting on other sectors.
“Manufacturers should give greater weight to defensive investment in the coming 12 months, with capital directed at reducing energy usage and improving production line efficiency to counter the challenge of the rising cost of raw materials."