EEF’s fourth quarter Manufacturing Outlook report, in partnership with DLA Piper, makes for disappointing reading. After three quarters of falling output in the official statistics, the next six months looks like more of the same. Here is the lowdown and a few bright spots from our survey.
Output and orders slide further
The final months of 2015 mark the third consecutive quarter in which we have reported a fall in the key output and orders balances in our survey, all of which stand now firmly in negative territory. If we look only at where the levels have settled over the past quarter, we would need to go back to 2009 to find lower balances on the output and orders questions.
However, it is probably more instructive to compare relative movements in the balances from the preceding quarter. On this measure, the decline in the output balance is the most significant since 2014q3 – the immediate aftermath of the collapse in the oil price.
% balance of change in the past three months
The export challenge continues
Global economic growth has weakened over the course of this year, dragging on world trade. Consequently, export orders declined sharply in q4 for the second consecutive quarter to the weakest in more than five years. Slower economic growth in emerging markets such as China has weighed on orders for UK exports.
The strength of sterling continues to dampen demand for exports in commoditised sectors such as basic metals and eat into margins. Europe remains the main source of demand for UK exports, even though our q4 survey results indicate that confidence about the region’s prospects has recently waned somewhat.
Cars and chemicals still on the up
The sector story is still dominated by the effects of the oil price slump. The metals, mechanical and electrical sectors which dominate the supply chain have consistently been the weakest performing sectors in our survey over the past year and this remains the case in the final months of this. We also expect there to be a lag between any recovery in the oil price and investment plans getting going again.
In contrast, the transport sectors have a momentum of their own and automotive production continues to grow strongly on the back of robust consumer demand and the introduction of new models. The prospects for the chemicals and pharmaceuticals industries are looking positive, with a drop in input costs for the former and the end of the patent cliff for the latter, driving growth in these sectors.
% balance of change in output
Investment and employment – is the recovery behind us?
The downturn in the manufacturing sector over 2015 has finally taken its toll on manufacturers’ plans to recruit staff and up their capital expenditure. These two indicators have proved incredibly resilient over the past five years despite fluctuations in our other key balances. This resilience has now ended, with both balances dipping below zero in q4 for the first time since q1 2010.
The well-publicised closure of iron & steel plants has also meant a significant reduction in headcount for manufacturers in the metals sectors. Metals are also the key drag in the negative investment balance, with the basic metals sector reporting a -22% outturn, the weakest in our survey. For the rest of manufacturing the picture is more nuanced.
The transport sectors continue to invest strongly, while the food & drink and chemicals sectors have joined the chorus since 2015q2. Still, the negative total balance is an indication of elevated headwinds in global markets, with the resulting uncertainty weighing on the confidence of manufacturers to invest and increase headcount.
% balance of change in employment and investment
Another quarter, another forecast downgrade
The environment for manufacturing has gradually deteriorated over the course of 2015. While the poor start to the year was concentrated on a smaller number of sectors, this weakness has broadened considerably as we approach 2016.
We expect a small contraction in manufacturing output in 2015, but we should see a return to growth next year. Although, at 0.8% this pace of expansion is around half of what we had pencilled in three months ago.
The leaders in 2016 will be the transport, chemicals and rubber and plastics, while further declines are expected in metals and mechanical equipment.
% change in output