Despite reports of weakening economic growth in the
UK , firms reported a rise in domestic orders. Export orders have also remained relatively strong although there are indications of a softening, possibly due to weakening conditions in the United States .
The survey did however add to the Bank of England’s concerns about inflation with firms having increased prices and more expecting to do so. In contrast, it also suggests that manufacturers have not been able to pass on all of the cost rises they have suffered and that profit margins have been squeezed. In addition, higher inflation is not currently feeding into higher wage settlements, with companies bearing down on wage costs to offset increases in other costs.
Commenting, EEF Chief Economist, Steve Radley, said:
“Manufacturers are providing a beacon of light amidst the current economic gloom and remain cautiously optimistic about their immediate prospects. Companies are responding to the squeeze on their margins from rising costs by continuing to invest in their businesses to drive up productivity. However, at a time of heightened uncertainty, the government needs to send a clear message that it will ensure that the UK remains an attractive place to do business."
Key findings
· Robust activity in second quarter
· Increasing pressure on margins
· Investment and employment intentions remain firm
· Companies confident about the next three months
· Projected growth for 2008 revised upwards
Output and orders showed positive balances for the tenth consecutive quarter, at +16% and +13% respectively. After falling significantly last quarter, the balance on domestic orders picked up, rising from +2% to +4%, whilst that for export orders edged lower to +10%.
In contrast to a mixed picture in the previous survey, all sectors reported strengthened output balances with the exception of motor vehicles and other transport, the two strongest sectors last quarter. All regions also reported healthy levels of activity with the North East seeing a large swing, climbing from –5% to +43% and –5% to 37%, respectively.
Whilst the employment intentions indicator eased to +3% from +9% this still marked the fifth consecutive quarter of positive balances. Recruitment was strongest in mid size companies between 100 and 150 employees with over a third planning to increase jobs in the next quarter.
However, the combination of higher raw material, energy, component and freight costs has clearly eaten into firms’ margins as they have struggled to pass on the all of the costs rises that they are facing. The domestic margins balance fell from –9% to –18%, while the export margins balance fell from
–8% to –14%. Despite this, there was a pick up in both domestic and export price balances, indicating companies have been able to raise prices to some extent, particularly in the basic metals and metal products sectors.
In spite of the pressure on margins, investment intensions remained firm in the last quarter. The balance of responses eased slightly to +14%, but nevertheless marked the fifth consecutive quarter of double-digit positive balances. Plans to expand investment were widespread, with all sectors recording positive balances.
Given the relatively upbeat survey results and the resilience shown by the sector in the first half of the year, EEF has revised up its forecasts for 2008. Manufacturing is forecast to grow by 0.9% and engineering by 1.3% this year, with a slight improvement in manufacturing next year to 1.0%. Engineering is expected to remain at 1.3% in 2009.
Bob Hale, Head of Manufacturing at Grant Thornton, commented:
"These figures show most manufacturers have made hay while the sun was shining, and are proving much more resilient to the credit crunch than many analysts had predicted. The pain of raw material price inflation and tighter refinancing is balanced by the gain of a weaker pound for exporters and the growing demand for the quality output that UK manufacturers have gained a reputation for producing."
ENDS