The Bank of England has been urged to hold interest rates this week and to move cautiously in the coming months amid evidence that growth in manufacturing has slowed in the last quarter.
The survey, published by EEF the manufacturers organisation together with RSM Robson Rhodes, showed that output and orders fell back over the last three months, with growth at its slowest pace since Q4 2003. This was in line with the forward-looking trends from the previous survey which showed a marked drop in confidence. Export orders outpaced domestic orders, continuing the trend of the last two years.
In addition, whilst manufacturing continues to see some growth, rising costs and competitive pressures are hindering attempts to rebuild margins. As a result, investment intentions remain subdued and have weakened a little in the last three months.
EEF also believes, whilst this soft patch may be temporary, the Bank should wait for clearer evidence on inflationary pressures rather than rushing into a pre-emptive move which might damage confidence. The government should also send out a clear signal that it is taking steps to avoid the need for business tax rises either this year or in future years.
EEF Chief Economist, Steve Radley, said:
“Whilst this slowdown in growth is not unexpected and may prove temporary, there is no room for complacency. Whilst manufacturing passes through this soft patch, the Bank of England and the Chancellor have a crucial responsibility to avoid measures which could unnecessarily damage confidence.”
Key findings
Output and orders slow as expected
Sector picture more mixed
Few companies increase prices and margins remain under pressure
Cashflow situation worsens
No sign of investment rebound
Companies more optimistic about next quarter
Manufacturing forecast to grow this year by 1.2% and engineering by 2.6%.
By sector the picture was mixed, with other transport equipment and metal products recording falls in output and aerospace being especially weak. The picture for the other sectors remained positive with the balances weaker than in the last quarter but higher than the average for the last two years .
The regional picture was also mixed. The North East and North West were the strongest performers whilst output fell in the East of England and West Midlands where the weak performance of motor vehicles was a contributing factor. Similarly the decline in metal products output held back growth in Yorkshire and Humberside.
However, companies remain unable to raise prices. Together with increasing costs and competitive pressures, this is keeping margins tight with companies' cashflow balance falling to its lowest level for two years. Given the dependence of UK companies on retained earnings to finance investment it is no surprise that investment intentions have been affected.
Lower output and orders volumes across some sectors also contributed to a slowdown in hiring. A balance of +2% of companies said staff numbers increased over the past three months and over half kept staffing levels unchanged. A fairly significant balance of motor vehicles companies cut jobs and employment in metals products also fell back. Job losses were mostly felt across the North West and Midlands regions. Companies are not anticipating any increase in jobs over the next three months and losses are again expected to be felt in motor vehicles.
The forward looking questions, however, suggest that the past three months may prove to be a temporary soft patch rather than the beginning of a prolonged slowdown. A balance of +18% of companies expected to increase output over the next quarter and +20% believe orders will rebound, indicating that growth in manufacturing should continue at least over the first half of this year.
Bob Hale, chairman of RSM Robson Rhodes’ National Manufacturing and Technology Group, commented:
“With the continuing high levels of raw material costs and increasing energy prices, there is a real need to encourage stability on interest rates and to persuade the government to provide positive help on taxation for the sector.”