The first quarter ‘Manufacturing Outlook’ report, published at the start of ‘Manufacturing Week’ reveals a larger than expected improvement in output and orders over the past three months and a broad based return of confidence across manufacturing. Companies are consequently the most upbeat since the financial crisis began in mid-2007.
However, EEF stressed a number of risks remain to manufacturers’ prospects. These include uncertainty about how to repair the public finances, ongoing access to finance issues and the sustainability of recovery in key export markets. Consequently, investment intentions are likely remain muted for some time.
Key findings
- Output and orders turn positive.
- Job losses continue to level off.
- Margins remain under pressure.
- Companies much more optimistic about next quarter.
- But investment set to be last indicator to recover.
Commenting, EEF Chief Economist, Lee Hopley, said:
“Having emerged from the recession at the end of last year, the start to 2010 was better than expected. Clearly more companies are becoming more confident about their prospects and we’re beginning to see the real benefits of an export-led recovery.
“But we have to be cautious about predicting a strong rebound, as a number of factors could knock growth off track. The recovery depends on world markets continuing to grow, and the financial system’s ability to provide finance is yet to be fully tested. Investment plans are also likely to remain on hold until manufacturers get a better sense of how a new government plans to repair the public finances.”
Tom Lawton, Head of Manufacturing at BDO, said:
“It is great news to see so many positive indicators from the EEF/BDO survey. However manufacturers still need to be careful as working capital funding pressures from this growth in activity are applied to already strained balance sheets. In particular, manufacturers should be monitoring the health of all major customers, monitoring and acting if aged debts begin to mount and considering the security of their supply chain.
“But on a positive note UK manufacturers do look to be making impressive gains in exports and it is hoped that the weakness of the pound enables further inroads to be made in both developed and the hugely growing emerging markets.”
Over the past three months a balance of 9% of companies across manufacturing reported rising output. Positive responses on new export orders confirm that the recovery in world trade is supporting some output growth. More encouragingly more companies are now expecting output and orders to expand than at any time since mid-2007.
However, the fortunes of individual sectors have been very mixed. Electronics stands out as one of the strongest performing sectors whilst motor vehicles, helped by the scrappage scheme, also saw an increase in the output balance for the first time 2008q3.
In line with the general improvement, all regions saw better conditions compared with the previous quarter. The biggest swings were reported in East of England and Yorkshire and Humberside. The rebound in electronics has provided a boost for the South East, South West and Scotland whilst ongoing weakness in the metals sectors and a patchy automotive performance has left output in the Northern regions below the UK average.
Job cuts continued to ease. One company in seven reported increasing employee numbers over the past quarter, with a similar proportion plan to recruit over the coming three months. But, investment plans continue to be scaled back. If balances follow the path of previous recessions it could be a number of years before they are firmly back in positive territory.
Looking forward, companies expect to build on a better than planned first quarter with increased output and a greater order intake. In the next three months a balance of 27% of companies expect output to be up, the highest figure since 2007q3.
This strong finish to 2009, coupled with a relatively stable and weak pound should provide some momentum for an export lead recovery in 2010 with manufacturing and engineering growing by 1.5% and 3.5% respectively. However, this should be seen in the context of expected falls in output in 2009 in manufacturing and engineering of 10.5% and 15.1% respectively.