Tougher times, uncertain outlook

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Our latest Manufacturing Outlook report confirms more challenging trading conditions across the sector.

Weakening across most indicators over the past three months

In our June survey manufacturers' confidence about the following quarter had come off the boil, with fewer manufacturers planning for continued expansion in output and orders. We've seen weaker indicators materialise over the past three months, but overall they remain in positive territory and well above the levels recorded during the recession.

Output and orders balance weakest since end of 2008/9 recession

But the outturn was, nevertheless, rather weaker than forecast with the balance of responses on output and orders coming in at +4% a +3% respectively - a near three year low.

Eurozone crisis and emerging market slowdown hit exports

The decline in the export balance to +2% from +11% in the previous quarter was particularly notable and of some concern given the importance of export sales for UK manufacturers. Further analysis suggests that in addition to challenging conditions in European markets, growth is slowing in markets outside the EU. This is supported by anecdotal feedback which has become less positive about demand prospects in Asia.

But manufacturing has strengths in diversity

For more than a year we've seen a divergence in responses across different sectors within manufacturing. If anything these variation have become more marked. Motor vehicles and mechanical equipment, for example, were positive positive about output levels in the past three months. However, a balance of companies in basic metals and metal products reported a decline in output over the quarter.

Employment and investment hold firm

Both indicators rebounded strongly post recession and have remained well above their long-run average. This was again the case over the past three months. There were some size differences with SMEs more likely to be recruitment and large manufacturers reporting stronger investment intentions. Responses indicate that companies are working to ensure they have the right people and the right equipment for a brighter medium-term outlook.

Outlook not expected to get worse

Short-term expectations remain positive for output and orders. But again, forward-looking balances have almost halved compared with the start of the year. Basic metals in planning for another difficult quarter, but other transport and electrical equipment are positive about output in in the next three months.

The weak official data since the end of last year combined with heightened uncertainty about global demand prospects has led to a further downward revision to our forecast for manufacturing growth this year. The sector is now expected to contract by 1.5% this year, with growth of 1.5% returning in 2013.

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Chief Economist

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