The Bank of England has been urged to leave interest rates on hold well into the New Year, with the latest survey of UK manufacturing showing confidence about future business conditions dropping sharply.
Making the call on the back of its fourth quarter engineering outlook survey EEF, the manufacturers organisation believes that companies are now beginning to fear the effects of higher raw material and energy costs, the impact on exports of a weak dollar and poorer conditions in major European markets.
As a result, after seeing robust growth across engineering throughout 2004, companies are now less optimistic about the early months of 2005, with the balances on output and orders the weakest since the second quarter of 2003, falling back to 8% and 12% from 27% and 29% respectively in the third quarter.
EEF Chief Economist, Steve Radley, commented:
"A wide range of cost pressures are now beginning to bear down on manufacturers and suggest that, after the calmer waters they have enjoyed over the last year, there may now be storm clouds on the horizon.
"The Bank should leave rates on hold until well into the new year and, if the current dip in confidence translates into a renewed manufacturing downturn, respond by cutting rates."
Key findings:
Output and orders remained firm in past three months
All sectors continued to grow
Ability to raise prices weakens
Export margins deteriorate to lowest level since Q1 2002
Investment plans hold up
Optimism for next 3 months falls away
Growth in manufacturing to slow over next year
The fourth quarter survey, published by EEF in conjunction with RSM Robson Rhodes, showed that in line with other survey data, the results for output and orders remained positive over the past three months. Two fifths of companies reported an increase, against only 20% reporting a decline, figures on a par with the previous quarter.
However, profit margins continue to be put under pressure as companies face large increases in energy bills, commodities and insurance, yet are unable to pass these cost rises onto customers through higher prices. Despite this, investment intentions are holding up, although the survey shows there is still some way to go before investment returns to pre-recession levels.
All sectors saw growth for the third consecutive quarter with electronics and electrical equipment especially strong. Basic metals and metal products said that demand remained firm both home and abroad, although output in both transport sectors was more disappointing.
In contrast to the third quarter, the regional picture was more uneven. Yorkshire and Humberside continued to report remained strong growth, whilst Scotland picked up on the back of an improvement in electronics. However, the North of England saw conditions deteriorate on the back of sluggish performance by the automotive sector.
Companies also reported falling profit margins, mainly on the back of a steep fall in export margins which fell to the lowest level since the beginning of 2002, with the largest fall coming in motor vehicle exports. Whilst domestic margins improved, they remained negative, with sharp falls in other transport and electronics despite the improved volume.
On a more positive note however, investment plans remain positive with a quarter of companies planning to increase investment in the next twelve months compared to 21% planning to cutback. However, despite this more positive picture the
In addition, the numbers employed in engineering increased for the second quarter continued with all sectors reporting an increase apart from motor vehicles. The North East and the West Midlands have been most affected by the fall in automotive employment in the last three months with the good conditions in basic metals and metal products supporting employment growth in Yorkshire and Humberside.
EEF also forecast that growth in manufacturing will slow over the next year, down to 1.9% from its previous forecast of 2.6% made in September.
Bob Hale, chairman of RSM Robson Rhodes’ National Manufacturing Group, commented:
"Those companies that have squeezed out costs as far as possible in recent years should be better placed to withstand any outside pressures on their businesses. Hopefully, we will see a return to confidence over the coming year, but clearly some sectors will have more obstacles to overcome than others."