Manufacturing Recovery II - the sequel

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Today's manufacturing PMI adds to the tally of good news coming from the manufacturing sector over the past couple of months.

Following last week's first estimate of manufacturing growth at 0.4% in the second quarter, 2013q3 is off to a positive start with activity reaching a 28-month high in July. The PMI indicator posted 54.6, up from a revised 52.9 in June.

Manufacturing PMISource: Markit Economics

There are a few reasons to be optimistic that this is more than a flash in the pan:

  • Orders from the domestic market are looking up, and so are a range of export markets - from the US and Mexico to the Middle East and Russia.
  • Support for orders growth is also coming from Europe. Separately the manufacturing PMI across the region turned positive for the first time in two years, with all major markets seeing an improvement (except Spain).
  • Underneath the broad manufacturing heading there is improving activity across consumer, investment and intermediate goods sectors.
  • Levels of stocks are being run down, which bodes well for future output growth.
  • Sign that manufacturers are recruiting have re-emerged.

All in all this is good news for the sector and the economy. But ... and there's always a but

Haven't we been here before?

Yes, we have. Back in 2010 and early 2011 activity was on the up only to be stopped in its tracks by an escalation of the crisis in the eurozone. The storm over our major market is starting to clear, but risks have just receded. While EEF surveys point to an ever-increasing focus on new export markets, particularly emerging economies, a further easing in the pace of growth in China or the US would impact on the pace of the recovery and the impact would likely be uneven across different manufacturing sectors.

and... is this finally the rebalancing we've been looking for?

Not quite, a recovery in manufacturing output and exports in only part of the picture. This must be quickly followed by companies investing. The long promised recovery in business investment is yet to materialise, which has not only been a drag on growth, but leaves the longer term competitiveness of the economy on shaky foundations. Moreover, without investment in new or additional capacity we could see parts of the supply chain struggling to respond as output and orders improve. We are still only at the start of the rebalancing journey.

On Monday we'll be publishing our updated forecasts for manufacturing and the economy.

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