The fourth quarter survey confirms that the worst of the downturn is behind the sector and the weak pound and recovering world markets are beginning to have a positive impact. But confidence across manufacturing remains fragile, as companies anticipate other obstacles on the road out of recession, such as increased exchange rate volatility and potential supply chain risks.
EEF also warned that given the experience of previous recessions when investment took some three to four years to recover, the steep cutbacks seen during the current downturn present a significant threat to industry’s longer term competitiveness.
As a result EEF is urging the Chancellor provide stability and certainty in the business environment in his pre-budget statement. In particular, he should leave supportive measures in place, such as the 40% first year capital allowances for an additional 12 months until April 2011. This also means forgoing measures that would raise taxes during a recovery that will stretch companies’ working capital.
Commenting, EEF Chief Economist, Lee Hopley, said:
“Whilst conditions are continuing to improve on the back of recovering world markets and a weaker currency, there is little to suggest that we are in for anything other than a long, slow haul out of recovery. Manufacturers have been grappling with extremely difficult trading conditions for more than a year now, but we’re not out of the woods yet and a great deal of economic uncertainty remains.
“Cutbacks in investment remain of particular concern. Whilst the need to address the public finances in the long term is urgent, this must be balanced with the need to continue with supportive measures underpinning a productive sector of the economy.”
Key findings
- Output and orders stabilise
- Employment and investment cuts continue
- A rapid rebound in activity is not expected
- But export prospects have improved
- Growth forecast to return in 2010
Tom Lawton, Head of Manufacturing at BDO LLP, commented
"Whilst it is pleasing to see that conditions in the sector have stabilised, with declines in orders easing, and somewhat brighter prospects on the export front, manufacturers still face a challenging year ahead."
"Fuelling this uncertainly is the continuing lack of credit from banks and credit insurers, concerns over further job losses and worries over exchange rate volatility. Despite these difficulties, manufacturers will need to ensure that they maintain the spending on their key differentiators such as innovation / R&D and customer service in order to maintain competitiveness. Cautious consumer spending and reduced public sector expenditures will also weigh heavily on the sector. The good news is that while we expect to see a flat performance across the first two quarters of 2010, we do expect to see a real improvement by the fourth quarter."
Over the past three months, the proportion of companies seeing output and orders decline has moved from firmly negative to almost in balance with those recording an increase. Responses on both indicators were the best since 2008q3. New orders have also improved, especially overseas where the balance on export orders has improved from -44% to -5% in the past six months.
In line with the improvement in output balances nationally, most UK regions have seen output improve from the lows reported over the past six months. In the South East and South West, a balance of companies saw output return to growth over the past quarter whilst the upturn in motor vehicle production has also helped the output balance in the West Midlands to edge nearer to the zero balance. However, the continued weakness in metals has kept some of the balances in the Northern regions below the UK average.
Following the historic lows of the second quarter, the third quarter saw fewer firms across all sectors reporting declining output across the board. With the exception of basic metals this trend continued in the past three months. Our survey suggests that this growth is coming from increased demand in export markets. While the responses in motor vehicles are the best since 2008q3, this is not expected to continue as the scrappage incentive and VAT cut ends at the end of 2009.
Whilst the improvement in conditions hasn’t yet put a floor under job losses in manufacturing the pace of cuts has at least slowed with the balance of companies reducing headcount in the past three months was unchanged from the previous quarter.
In the first three quarters of this year investment balances have remained below their long term average as companies rapidly scaled back plans for capital expenditure over the next 12 months. There has been some improvement over the past three months, but at -17% the balance does not indicate a recovery in investment plans in the near term.
Looking forward, whilst companies expect to see an improvement in conditions throughout 2010 growth is likely to be anaemic. EEF is forecasting manufacturing output to have contracted by 10.4% in 2009 but to grow by only 0.9% in 2010. Engineering output is forecast to decline by 16.0% this year and zero growth next year.