Executive Survey 2014 – Half time

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We kicked off 2014 with our annual Executive Survey; a look ahead at manufacturers expectations for the next 12 months.

We're at the half way point, so a good time to check in to see if trading conditions, opportunities and potential risks are so far playing out as expected.

First a quick recap of the Survey headlines:

  • 70% of manufacturers were forecasting improved economic conditions over the next 12 months in the UK compared with 30% at the start of 2013.
  • 62% expected a stronger industry performance, up from 30% the previous year.
  • Expectations on employment, sales, profits and productivity were all more positive than in the previous two years.
  • The main growth opportunities were seen as increased demand in emerging markets and from sales of new products
  • There were still risks aplenty, with the biggest movers on the 2013 upward pressure on pay; rising input costs and insufficient supply chain capacity. Exchange volatility still featured strongly with over a third of manufacturers citing as a risk to growth.

The story so far:

Manufacturers' growth expectations are on track. Output was up 1.4% across manufacturing in the first three months of the year – the fastest pace of growth since mid-2010 and the highest level of output seen for two and a half years.

Employment and productivity are on an upward trend. Not much data for 2014 thus far but 2013 finished with output per hour is manufacturing increasing at its fastest pace since the start of 2011 and the sector also notched up its fourth consecutive quarter of employment growth.

Export growth not quite as expected. At the start of the year 43% of manufacturers were planning for an overall increase in export sales this year – as discussed previously – this has been the cloud in an otherwise brighter outlook.

So far, so fine … what about those risks?

The biggest shifts among potential 2014 risks were:

% of companies citing as biggest 214 risk to growthSource: EEF Executive Survey

1. Rising input costs – citied by a third as the biggest risk to growth and up 16 percentage points from the previous year. One of the main concerns here was the rising price of energy, particularly relative to competitors. A large element of this was domestically inflicted taxes which were set to push up UK energy costs. Steps were taken in Budget 2014 to hold down green levies, which should go some way to mitigate future worries on costs. Elsewhere, input costs have been edging down gradually so far this year.2. Significant upward pressure on pay – cited by 8% as the main risk to growth, up six percentage points from a year ago. Again, big hikes in pay have not materialised in the two major pay rounds so far this year, nor will we see an inflation-busting increase in the minimum wage later this year. As our blog last week showed settlements across the sector have been stable at around 2.5% for the past two years. However, growing skills shortages will be putting pressure on pay for some occupations.

3. Insufficient supply chain capacity – cited by 10% as a main risk to growth, up five percentage points from a year ago. This was a clear feature of discussions during the early phase of recovery back in 2010 as investment cut backs had left some companies ill-prepared for an upswing in demand. With growth picking up pace, but investment only following now, supply chain constraints are likely to re-emerge.

Exchange rates are also worth a mention as arisk to growth, the last word on that goes to last week's blog - A Sterling performance?

Manufacturing does appear to be on track for a solid year of growth in 2014, as companies were planning for at the start of the year. So far, factors that could derail the recovery have not materialised, but there are still plenty of issues that manufacturers and policy-makers will need to remain live to if the UK is sustain and build on this growth - not just through 2014, but in the longer term.

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Chief Economist

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