Impact of oil price fall evident in orders, sectors and regions
- Output and orders positive and in line with expectations
- Domestic demand dips but signs export growth has returned
- Manufacturers confident for prospects and UK economy in year ahead
- Recruitment and investment intentions remain strong
- Manufacturing growth forecast reduced to 1.7%, GDP growth up to 2.8%
Britain’s manufacturers have enjoyed a relatively strong start to 2015 with confidence for the rest of the year being translated into continued intentions by manufacturers to recruit and invest according to a major survey published today by EEF, the manufacturers’ organisation and global law firm DLA Piper.
The survey shows that while the economic environment has been somewhat turbulent export orders nudged back into positive territory for the first time since 2014q2 with some manufacturers reporting signs of improving demand from European customers, a sign that a long-awaited improvement in the sector’s trade performance is on the horizon.
A key economic development in recent quarters has been the sharp fall in the oil price – hailed as a boon for consumers, but with some negative consequences for manufacturers in the oil and gas supply chain. The survey highlights the more challenging domestic demand environment this has created for sectors with a high exposure to delayed or cancelled investments in the North Sea.
Overall, the survey suggests that the positive run of output expansion across manufacturing for the past eight quarters will carry on in the first half of 2015. Investment plans continue to look robust compared with past trends, a good sign for growth and productivity in the sector.
Commenting, EEF Chief Economist, Miss Lee Hopley, said:
“Any concerns that manufacturing activity might wobble at the start of 2015 have been quashed with our latest survey showing that the main output, orders, employment and investment indicators all remained above their long-term average over the past three months. Particularly promising are signs of a return to growth in new export orders, vital for balanced growth in the UK.
“It’s clearly not plain sailing for all with the drop in the oil price feeding through to weaker demand in the oil and gas supply chain. While confidence levels overall are holding firm in manufacturing, policies to sustain positive investment plans, encourage exporters and improve access to skills remain the order of the day.”
Richard May, partner and Head of the Manufacturing Sector at DLA Piper, says:
"As a global law firm, it is particularly pleasing for us to see new export orders growing alongside a generally positive outlook for the British manufacturing sector with companies still intending to recruit and invest. It will be interesting to see what impact the result of the UK general election has on the outlook for manufacturers in the next quarterly EEF/DLA Piper survey."
According to the survey manufacturers reported positive order balances for the eighth consecutive quarter, although at +13% the balance was down slightly from +17% in the final quarter of 2014. Orders drifted down to +5% from +10%.
In contrast to previous quarters where growth has been driven by domestic demand, the balance eased to just +1%, down from +11% while export growth edged into positive territory at +1%, up from -3%.
However, this weakness in UK demand is limited to a few sectors, particularly those focused primarily on the oil and gas supply chain. Some of the sectors with a high presence in the UK oil and gas supply chain are basic metals, metal products and mechanical equipment. In each of these cases, manufacturers reported that UK orders had fallen in the last three months.
Looking forward however, companies are growing in optimism with the balances on output and orders increasing to +21% and +20% respectively. Domestic demand is also expected to recover to +14% and export orders to increase by +13%.
This positive outlook is reflected in job prospects and investment intentions which continue to remain reasonably strong. A balance of +16% of manufacturers plan to increase capital expenditure in the next three months, the same as last quarter, which makes the nineteenth consecutive quarter of positive intentions.
While recruitment intentions eased in the past quarter to +9%, down from +21%, hiring is expected to pick up in the next quarter on the back of the positive outlook to +16%. There is particular strength in recruitment plans amongst small and medium size companies in the coming quarter. This mirrors official data where manufacturing employment has grown for seven consecutive quarters.
Manufacturing output is forecast to continue to grow at a healthy 1.7% this year, revised down slightly from 2% last quarter. GDP is expected to increase by 2.8% in 2015, a slight upward revision from 2.6% last quarter.