As we blogged earlier this week
, momentum in the manufacturing sector appears to have waned in the first half of 2015. However, there is another trend beneath this that today’s blog will explore: increasing sectoral divergence. We'll take a look at three factors causing this divergence: the weakness in oil and gas, continued strength – but price sensitivity – of the UK consumer, and soft demand in major export markets.
Oil and gas remains a drag
Last quarter’s Manufacturing Outlook survey saw the emergence of the drag on growth to companies in the oil and gas supply chain following the slump in the oil price. As investment in this sector remains on hold this drag has continued, with highly exposed sectors – especially mechanical equipment – reporting challenging times. Other sectors in the supply chain – such as metal products and electrical equipment – have also been hurt. However, these sectors have both benefited from exposure to other sectors, particularly the consumer and construction sectors which have been a source of strength for manufacturing for some time.
In addition, the oil price has picked up of late and some anecdotal evidence from manufacturers suggests that should the oil price increase further (to around $70p/b) this may be enough for capital spending in the North Sea to pick up again. That said, it was thought likely that there would be lag of 12-18 months before any increase in capital spending filtered through to the supply chain.
Consumer demand is strong, but margins are tight
Consumer strength has been a real positive for domestically focused sectors such as food and drink, which grew by 5.2% last year. But even here the picture is not straightforward. Suppliers in this sector have faced a squeeze resulting from supermarket price competition, keeping margins tight.
While we expect the food and drink sector to grow this year, it is likely to be at a much more moderate pace than in 2015.
Export markets still challenging
In contrast to sectors facing the domestic consumer, more export-intensive areas – such as electronics – have continued to face headwinds as demand around the globe remains soft. As a result, growth in these sectors is likely to slow in 2015. There is some positive upside risk, however, as our survey showed almost a third of manufacturers saw a notable increase in demand in Europe in the last three months. Next week's second estimate of Eurozone GDP data will be one to watch to see if the rate of growth in the region is confirmed. On the flipside, news from Greece today is a reminder of just how fragile the recovery in Europe remains.
For more details on the trends affecting our sector outlook, check out our latest Manufacturing Outlook report.