Manufacturing posts fastest annual growth since 2010 | EEF

Manufacturing posts fastest annual growth since 2010

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Today’s IoP figures confirm that production grew by 1.4% - its fastest annual pace since 2010. Despite challenging global economic conditions in the latter half of the year, the IoP still grew by 0.1% in Q4 against market expectations. Over the year, the manufacturing sector - the largest component of the IoP - grew solidly to offset a large contraction in energy output.


Manufacturing leads the way


The manufacturing sector is exclusively responsible for the growth in the IoP – expanding by 2.7% on year – whereas all other production sectors failed to grow in 2014.  Nevertheless, manufacturing was not immune to the H2 2014 global slowdown with growth cooling from 1.1% in Q1 to just 0.2% in Q4.



This is to be expected given the sector’s export intensive nature with demand drying out from developing and developed countries alike.  Still, a robust domestic market and some reorientation towards high-growth export markets (see Felicity's blog) have led to the fastest pace of growth in manufacturing for over four years.


By contrast, mining & quarrying stayed almost flat (-0.2%) while the electricity & gas sector was the major drag on the IoP figures. The energy supply industry shrunk by 5.8% over the year as the June free-fall in the oil price has placed severe cost pressures on North Sea production. Output in the sector was hit hard in Q4 falling by -2.7%.


The oil-price effect


While the drop in the oil price looks to be detrimental for the oil & gas extraction sector its impact on production in general has been more diverse. The latest PMI figures suggest that towards the end of 2014 the lower oil price has been feeding through to the manufacturing sector in the form of lower input costs. But the channel through which a lower oil price feeds into lower input costs for manufacturers has several layers:


  1. Manufacturers who have recently renegotiated their gas contracts will be seeing savings in their energy costs.
  2. Manufacturers in the chemicals sector who use oil or gas as an input into production should also see a direct impact.
  3. Most manufacturers benefit indirectly as lower input costs feed through the supply chain via the use of oil-intensive components (such as chemicals) into production.
  4. The entire manufacturing sector benefits from lower logistical costs - e.g transport costs.


However, there are also notable losers. Manufacturers that provide equipment to the oil & gas extraction industry are suffering as the slump in oil prices is leading to the cancellation of projects and dwindling orders.  Still, on aggregate, a lower oil price should be positive for manufacturing  by pushing down input costs and thus increasing output and margins.

The fall in the oil price is likely to have compensated for some of the weakness in foreign demand and helped to sustain output growth in manufacturing for the last two quarters of 2014. Yet, there is still uncertainty about how far the impact from the lower global oil price has fed through to the production industries as well as its consequences on differents layers of the supply chain.


Domestic market holds up


The domestic market continued to drive growth in manufacturing in the last quarter of Q4. The strongest performer over the year was the non-metallic minerals sector which grew by an impressive 12.8% in GVA terms. The sector supplies most of its output to the construction sector which boomed in 2014 – growing by 6%. The food & drink sector, which predominantly caters to the domestic market, continued its strong growth at around 5%.


Finally, the rubber & plastics sector had a solid year mostly down to the upturn in construction as well as the robust performance in the motor vehicles sector. Of export-intensive sectors the transport equipment industry posted the strongest growth contributing 1.10 percentage points to production growth over the year. The Another stand-out performer was the electronics sector which despite tigheting demand conditions in key export markets still added 0.69 percentage points to production growth.


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