Sector Friday: Sector Forecasts

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As part of our Sector Fridays series, we look at the outlook for manufacturing sectors in the year ahead

Manufacturing output has grown every quarter to date this year, and exceeded expectations by growing 0.9% in the third quarter. Our Business Trends Survey shows manufacturers were positive about the past three months, in line with a range of business confidence surveys, and we expect growth to be maintained in the final quarter of this year, though the sector will contract slightly overall in 2013, as a result of big falls in output in 2012.

Looking ahead to 2014, it seems likely that growth will continue at a fairly healthy pace; we are forecasting a 2.7% increase in manufacturing output next year. However, this growth will not affect all sectors equally. While the transport sectors continue to look strong and other sectors will benefit from infrastructure and construction projects, there are still a range of risks facing manufacturers. International demand is still uncertain and the recent appreciation of Sterling will hurt manufacturers in more commoditised sectors; energy costs are hurting some companies; and shifts in consumer demand – though providing opportunities for some – make for a challenging outlook.

Transport sectors have continued strength, which should also drive growth in other sectors

The strength of the transport industries, both motor vehicles and other transport, is expected to continue into 2014. Motor vehicles will continue to benefitfrom strong domestic and emerging market demand, though there are signs that a still-weak Eurozone is hitting demand for commercial vehicles. Within other transport, aerospace continues to benefit fromlong order books and backlogs that mean employment is likely to increase in the sector next year. Demand for rolling stock should benefit from major infrastructure projects such as Cross Rail,though the impact of this will be stronger in 2015.

Sectors benefit from exposure to infrastructure and construction projects

More broadly, a turnaround in the construction industry – resulting from the government's Help to Buy scheme and increased demand from infrastructure projects – is making itself apparent in the non-metallic minerals sector, where some manufacturers report that they are now facing capacity issues. Although the sector is likely to contract in 2013, following a weak start to the year, we expect strong demand to lead to growth of 4.8% in 2014. This is also likely to feed into growth in employment of 2.7%.

Another sector poised to benefit from infrastructure investment is electrical equipment which – following a slight contraction in 2013 – should grow by 4.3% in 2014 as companies benefit from a series of major projects both in the UK and in Europe. We expect this to be linked to a modest increase in employment.

As growth starts to pick up across manufacturing more generally, the mechanical equipment sector should benefit from this. The sector had a challenging start to 2013, but should see a turnaround next year though this is also dependent on rising international demand.

Exchange rates a concern for metals manufacturers

The metal products sector sells into a number of sectors and – though a contraction in 2013 looks likely as a result of a slow start to the year – the sector should benefit from increased demand in construction and automotive in 2014. Similarly, the basic metals sector is well placed to benefit from increased domestic demand.

However, looking at export demand, the two sectors share a common vulnerability to exchange rate swings. The recent appreciation of Sterling will hit the competitiveness of these two sectors, particularly compared with key competitors in Europe, and this is likely to dampen growth prospects going into 2014. We expect employment to fall in both sectors in 2014.

Energy prices are proving an issue for manufacturers

As well as exchange rate fluctuations hitting output costs and demand, most manufacturing sectors are being hit by higher European energy prices. In particular, the rubber and plastics sector has seen some upstream plastics manufacturers moving to the Middle East and the US where energy costs are lower. Nonetheless, companies in the sector have invested to boost competitiveness and flexibility and we expect the sector to grow by 2.5% in 2014, accompanied by a modest increase in employment.

The chemicals sector, like rubber and plastics, is also affected by high energy prices and has seen some plant closures in the last year. Within chemicals, the pharmaceuticals sector has faced challenges resulting from the patent cliff, though these are likely to ease, and a number of companies have reported increased sales and profitability. We expect the sector to grow 1.0% in 2014.

Changing consumer tastes and trends will impact some sectors

The food and drink sector is notably consumer facing and after contracting for two years it is likely to start growing in 2014 amidst rising consumer confidence.

This rise in consumer confidence will not provide a boost to all consumer-focused sectors however. For example, the paper and printing sector as a whole is facing long-term challenges as demand for printed goods continues to decline. Although some innovative companies in the sector will benefit from demand for things like speciality paper, the sector as a whole is likely to see falling output and employment in 2014.

The electronics sector is also highly exposed to consumer demand, and large shifts towards more mobile computing is changing the shape of the sectorand requiring flexibility on the part of firms. Our survey suggests that companies in the sector are upbeat, and as such we are forecasting a slight increase in output in 2014. However, as much of this growth will be achieved through efficiencies and mergers and acquisitions activity, we are predicting a small fall in employment.

Finally, the textiles sector is benefiting from an increase in interest in UK-made goods and we now expect some growth in the sector in 2014, following two years of contraction.

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