However, the survey highlighted the first signs emerging of a possible impact of the strong pound against the dollar with the balance on export orders falling to its lowest level in almost two years. Uncertainty about the effects of currency and the US economy has also led to a fall in forward looking indicators for export orders with the balance falling from +22% to +9%. The forward looking balance on domestic orders also shows a slightly smaller fall from +17% to +8%.
Furthermore, as a result of the strong growth, for the first time there are signs of stronger pricing power beginning to emerge for manufacturers. This could create a dilemma for the Bank of England, with pressure to raise interest rates to tackle rising prices on the one hand only serving to maintain the strength of the pound and damage export prospects on the other.
Key findings:
- Output remains firm
- Some weakening of export order balances
- Firms positive on employment and investment
- Slight increase in pricing power
- Optimism for next three months continues though concerns about US
- Growth should be maintained in 2007 and 2008
Commenting on the results, EEF Chief Economist Steve Radley, said:
“Manufacturers are continuing to enjoy healthy trading conditions at home and abroad and this is being translated into better prospects for investment and employment. However, we may be seeing the first impact of the strength of the pound against the dollar and this is affecting expectations for the rest of the year.
On interest rates, Radley added:
“Business accepts that higher interest rates can be a pay price worth paying to maintain economic stability and keep inflation low. It also understands the Bank's concern over increasing numbers of companies intending to raise prices.
However, with wages and factory gate prices rising modestly, there is no need for an immediate rate rise, although the case for an increase may build further out. "
Output and order balances have now been in double digit territory for six quarters in a row with the overall balance of +23% (up from +17% in Q1) the best since 1996. However, in marked contrast to the last couple of years, export orders showed a significant drop from +16% to +10%, with the slack being picked up by domestic orders which increased to +8% (up from in q1), the best performance since Q4 2004.
All sectors experienced strong growth across the board, with especially strong performances by metal products and motor vehicles, the latter seeing a large jump in activity from zero to +34% indicating a continued recovery. Other transport and mechanical equipment recorded positive balances for the ninth and thirteenth quarters respectively.
The positive picture has also translated into a firmer picture for employment, especially for companies with less then 100 employees and those working in the transport industries. Sustained buoyancy in output and orders is also cementing investment intentions, with positive balances having been recorded since the beginning of 2006. Intentions were positive in all sectors but especially marked in transport and metal products, reflecting the strong order and output balances in these sectors.
Separately, EEF also used the survey to draw attention to the significant discrepancy which now exists between private sector surveys and official data which, in the last quarter, showed industry on the verge of recession.
Martyn Pilley, of RSM Robson Rhodes’ National Manufacturing and Technology Group said:
“The outlook for the next quarter looks encouraging with a slowdown in job cuts, further positive feedback on investment intentions and output and orders remaining buoyant. Whilst pressure continues on margins it is encouraging to see signs that this burden is easing. However, the strength of the pound against the US dollar is almost certainly now beginning to have an impact on export order books.”
ENDS
The survey was conducted between 3 and 23 May, with 907 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.
The EEF/RSM Robson Rhodes Engineering Outlook Report is sponsored by RSM Robson Rhodes, an international firm of chartered accountants and consultants. Its Manufacturing Technology Group offers a wide range of financial and advisery services to both private and listed engineering companies. This team provides advice on mergers and acquisitions, raising finance, tax efficient investments/deal structuring, manufacturing/business strategy, recruitment/remuneration and accounting issues.