Even with output holding up over the last few months, the EEF/Grant Thornton survey shows that a stagnant
UK economy and a sharply deteriorating eurozone are now impacting on all sectors of manufacturing. However, the survey also shows the continued dilemma facing the Bank of England as companies’ price expectations continue to rise.
EEF believes it therefore falls to the government to address the rising risks of further economic weakness. By bringing forward policies that buttress business from gathering economic headwinds, EEF believes government can minimise cuts to jobs and investment and pave the way for an eventual upturn.
Commenting, EEF Chief Economist, Steve Radley, said:
“Manufacturing has shown considerable resilience in the face of a credit crunch, a global economic slowdown and a massive increase in its costs. But there are now clear signs that these pressures are starting to take their toll on companies
“Given the Bank of England’s hands remain tied in the short term, it is now essential the government tackles this turning point for the economy head on. It must avoid adding any further costs to business and put in place policies which will provide the building blocks for an upturn.”
Key findings:
Output holds up in last three months
New orders at 3 year low
Domestic orders plummet but exports remain firm
Price expectations rise
Profit margins deteriorate
Employment and investment intentions go into reverse
Sharp decline in expectations
Output held up in the last three months for the twelfth consecutive quarter, eleven of which have been in double digit territory, highlighting the strength of manufacturing in recent years. However, the balance on orders fell eleven points to its lowest level for 3 years. This was largely due to fall in domestic orders (down to -13%) as export orders rose from +10% to +18%, fuelled by a weaker pound.
While the output balances remained positive across most sectors, five of the seven sectors surveyed reported weaker activity compared with the previous quarter. Basic metals and electrical equipment saw the sharpest falls, relative to last quarter whilst electronics and other transport equipment were the only two sectors to show an improvement in trading conditions, reporting strong balances of +46% and +43% respectively.
The picture by region was similar to that by sector. Whereas in the last survey all regions had reported positive balances, both output and order balances across all regions have weakened. Both the North East and the West Midlands saw negative output balances of -5% and -4% respectively whilst only three regions, North West, South West and Yorkshire and Humberside reported positive orders balances.
As might be expected, the slowdown is now beginning to impact on employment and investment intentions. The balance on investment was negative (-1%) for the first time in ten quarters, whilst all regions reported weaker employment balances. Looking forward the picture is for greater levels of job cuts with only London and the South East and Eastern regions planning to increase staffing levels.
More firms were able to raise both domestic and export prices in the past three months, as the balances picked up to +27% and +18%, respectively. However, the survey shows that this has not translated into an improvement in profit margins where the balances on both domestic and export margins remained negative.
Looking forward, despite output holding up in the past three months the survey shows falling confidence levels amongst manufacturers. Both output and orders balances entered negative territory for the first time since the end of 2002 and expectations for both domestic and export orders have weakened.
Bob Hale, Head of Manufacturing at Grant Thornton, commented:
"UK manufacturing has looked to its export markets for buoyancy this year, but it seems many of the key markets we export to, particularly in Europe, are now coming down with the same malaise afflicting both the US and the UK. However, exporting to emerging markets is still seen as an insulating factor and those UK manufacturers that are able should now be exploring these markets with renewed vigour.
"The majority of manufacturers will now be part of the chorus calling for new Government initiatives to support the sector, as any respite will now be welcome in what is likely to be a winter of economic discontent."
ENDS
The survey was conducted between July 31st and August 20th, with 798 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.