Manufacturing surges to three year high

Investment intentions rise sharply

· Output and orders rebound strongly to balances last seen in 2010

· Gains are broad based across all sectors

· Domestic markets leading rebound

· Investment intentions rise to six year high

· Recruitment holds steady

· Forecasts for 2014 upgraded for both GDP and manufacturing

 

Britain’s manufacturers are experiencing a surge in activity as the long awaited recovery begins to take hold with output balances reaching their highest level for three years according to a major survey released today by EEF, the manufacturers’ organisation and accountancy and business advisory firm BDO LLP.

The rebound this quarter is being led by a stronger domestic market which has often lagged behind exports. But, conditions in overseas markets have also picked up with the balance of companies seeing growth in export sales rising to a two-year high in the past quarter. In line with recent official statistics the upswing in output is broad based across all sectors.

There are also signs the UK’s investment performance may finally begin to regain ground lost in the past three years with investment intentions, especially amongst SMEs, escalating sharply to some of the highest levels seen in the survey’s history.

This is critically important if we are to see a rebalancing of the economy towards net trade and investment and, avoid relying on the consumer and the housing market to drive the economy forward.

Commenting, Ms Lee Hopley, Chief Economist at EEF, the manufacturers’ organisation, said:

“Industry’s prospects have brightened considerably in the past few months and it’s particularly positive that this improving trend can be seen across all manufacturing sectors. There is growing confidence that improving trading conditions will continue into the final months of this year and then accelerate through the gears in 2014.

“However, while the signs of recovery that have emerged so far this year are positive, the need for better balanced growth from net trade and investment remains a necessity. As companies become more confident about their growth prospects, we need to see this translate into commitments to invest in new capacity, and for this to take place in the UK.

Commenting, Tom Lawton, Head of Manufacturing at BDO LLP said:

“A domestic market at its strongest for almost three years, backed by export sales at a two year high, means UK manufacturers across all sectors and throughout the supply chain are feeling the benefits of an impressive return to confidence.

“The positive change in investment intentions is a powerful and important indicator, and key to the future growth and positioning of the sector in the global market. But let’s reiterate, this is not ‘manufacturing sector - job done’ for the government. We must use it as a strong foundation for continued efforts to ensure the sector gets the support it needs to act as an engine of change for the UK economy.”

According to the survey a balance of 32% of companies reported increased output, up from 12% in the last quarter and the highest since the beginning of 2010. Orders balances also increased significantly, up to 27% from 7% in the last quarter. In contrast to the last few years where there has been clear sector divergence, the survey showed broad based increases for all sectors, the first time this has happened for over a year. The strongest positive output and orders balances were reported in the electrical equipment, 42% and 35% respectively, and motor vehicles, at 44% and 39%, sectors.

Both export and domestic order balances have seen a solid rebound this quarter, although unlike the recovery in 2010, the domestic orders balance at 20% is stronger than the export orders balance of 15%. Domestic orders were stronger than export orders in all sectors except the mechanical equipment sector, which is one of the more export intensive manufacturing sectors.

Investment intentions have rebounded to reach the second highest level seen in the history of this survey. A balance of 24% of companies said they are planning to increase their capital investment in the year ahead, up from a balance of 7% last quarter. This pickup in investment plans was driven by small and medium-sized companies and may be a sign of both greater levels of confidence but also a concern about capacity as output and orders start to gather pace.

The survey also showed the positive investment intentions were reported by companies in almost all sectors with metal products and mechanical equipment manufacturers especially strong with balances of 35% and 25%.

Recruitment balances held steady with a balance of 12% of companies reporting that they had increased employment in the last three months, up from 11% last quarter. Smaller companies were responsible for all of the growth in employment this quarter with a balance of 3% of larger companies reporting employment had decreased in the last three months. Unlike in previous quarters, all sectors posted positive employment balances and this quarter the rubber and plastics sector had the strongest positive balance at 30%.

Looking ahead to the next three months, companies expect orders from both domestic and export markets to increase by 24% and 19% respectively, with UK demand expected to continue to outweigh demand overseas. Recruitment is also expected to moderately increase with a balance of 16% of companies expecting to increase employment in the coming three months.

The more positive economic data for manufacturing in recent weeks has caused EEF to upgrade its forecasts for the economy and manufacturing for 2013 and 2014. The economy is forecast to expand by 1.2% (1.1%) this year whilst manufacturing is expected to contact by 0.5% (0.7%). However next year growth is expected to accelerate with the economy growing by 2% (1.8%) and manufacturing by 2.1% (1.9%).

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