EEF/BDO Survey – Industry continues easing from lofty heights of last year

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Brexit in-fighting has to end to halt falling investment

Key findings:

  • Output and order balances drift down but remain positive
  • Gap between exports and domestic orders widens
  • Growth potential in major export markets ease
  • Broadly positive sector picture, but construction facing sectors lag
  • Recruitment and investment ongoing but latter ebbing away
  • Growth forecasts revised down

Britain’s manufacturers have seen an easing in conditions in the last quarter, continuing the downward drift from the very strong picture of growth seen across the board during 2017 according to a major survey published today by EEF, the manufacturers’ organisation and accountancy and business advisory firm BDO LLP.

According to the EEF/BDO Manufacturing Outlook Q2 survey, manufacturers are still seeing a positive picture and business confidence indicators are holding up looking forward to the second half of the year.

However, the combination of an easing of global growth and increased political uncertainty at home and abroad, has pushed the output balances in some sectors down from the lofty heights of last year. Together with a weaker outlook in the construction sector supply chain this means the outlook for the sector as a whole is slightly more subdued than it has been for some time.

In addition, whilst recruitment and investment are still positive, the latter has fallen to the lowest level for a year. This is very much at odds with the picture EEF would hope to see given the expectations of continued output growth and emerging capacity constraints, which suggests that the continued political uncertainty of Brexit negotiations is weighing on business investment.

Commenting, EEF Chief Economist, Ms Lee Hopley, said:

“We continue to see signs of growth across manufacturing and, given weaknesses elsewhere in the UK economy, it is vitally important that we sustain this. However, the durability of this upturn is looking somewhat more fragile as many of the positive forces driving expansion last year such as a resurgent eurozone, a surge in global manufacturing investment and competitive pound are starting to fade.

“New or heightened uncertainties have also come into play, not least what feels like crunch time in the Brexit negotiations which have led to amber lights flashing again on the business investment outlook. This matters both for growth now and our longer term productivity prospects.”

Tom Lawton, Partner and Head, BDO Manufacturing, said:

“Following a record breaking 2017 and a strong start to 2018, we are starting to see the impacts of the ongoing political and economic uncertainty on the UK manufacturing sector. However, despite the sector’s slowing performance this quarter, manufacturers - which are the economic engine of the UK economy – still remain cautiously optimistic about the future.

“It is now more important than ever for the Government to not lose sight of the needs of manufacturing, or indeed the wider economy, during the continuing EU negotiations. I have no doubt that UK manufacturing will continue to be successful but the right support and trading environment will make a huge difference to manufacturers. Having more transparency from the Government will give them the confidence to invest in skills, automation and digitisation, which are so important to the future of UK manufacturing.”

According to the survey, whilst overall output and orders eased downwards they still remained in positive territory and above their long run average at +26% (+30% in Q1) and +23% (+30% in Q1).

Whilst the gap between export and domestic orders had closed significantly over the last year it went into reverse in the last quarter. Export orders posted a balance of +20 % (29% in Q1) whilst domestic orders slipped significantly to +9% from +21% in Q1.

In the last year growth has been broadly based across all sectors. In the last quarter, however, there was a marked difference between those sectors still benefiting from global growth and investment in capital equipment, such as basic metals and mechanical equipment, and the performance of sectors such as rubber and plastics and electrical equipment in the UK-focused construction sector supply chain.

Despite this easing, the outlook for firms in the second half of the year remains firm as output (+26%) and orders expectations (+20%) hold up. This is resulting in continued recruitment intentions of +17% (+21% in Q1) but a fall in investment intentions which have now halved since the last quarter of 2017 (+10% from +18%).

The picture on prices will be a welcome one for the Bank of England as price increases in the UK are fading in line with the fall in producer price inflation. In contrast manufacturers in sectors such as metals and basic metals have higher pricing power on the back of global demand and increasing commodity prices.

In light of the weakness in GDP growth at the start of the year, expectations that global growth has passed its peak and a subdued investment outlook, EEF has made a downgrade to its economic forecasts. It is now forecasting GDP growth of 1.2% in 2018 and 1.3% in 2019 (1.5% and 1.3% respectively from Q1. Manufacturing should continue to grow at a strong year-on-year pace by 1.9% and 0.5% (down from 2% and 0.6% respectively).

The survey covered 337 companies from 2 to 23 May

ENDS

About EEF

EEF, the manufacturers’ organisation, is the representative voice of UK manufacturing, with offices in London, Brussels, every English region and Wales.

Collectively we represent 20,000 companies of all sizes, from start-ups to multinationals, across engineering, manufacturing, technology and the wider industrial sector. We directly represent over 5,000 businesses who are members of EEF. Everything we do – from providing essential business support and training to championing manufacturing industry in the UK and the EU – is designed to help British manufacturers compete, innovate and grow.

From HR and employment law, health and safety to environmental and productivity improvement, our advice, expertise and influence enables businesses to remain safe, compliant and future-focused.

About BDO LLP

Accountancy and business advisory firm BDO LLP provides integrated advice and solutions to help businesses navigate a changing world.

Our clients are Britain’s economic engine – ambitious, entrepreneurially-spirited and high growth businesses that fuel the economy. 

We share our clients’ ambitions and their entrepreneurial mind-set. We have the right combination of global reach, integrity and expertise to help them succeed. 

BDO LLP

BDO LLP operates in 18 offices across the UK, employing 3,500 people offering tax, audit and assurance, and a range of advisory services. BDO LLP has underlying revenues of £428m and is the UK member firm of the BDO International network.

BDO’s global network

The BDO global network provides business advisory services in 162 countries, with 74,000 people working out of 1,500 offices worldwide. It has revenues of $8.1bn. 

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