IoP drops in January but momentum in manufacturing remains strong | EEF

IoP drops in January but momentum in manufacturing remains strong

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Today’s IoP figure shows a contraction of 0.5% in manufacturing output between December 2014 and January 2015, reflecting turbulence in global markets in the beginning of year taking its toll on output growth.

This should not be a real cause for concern however with global uncertainty levelling out and other business surveys indicating strong underlying momentum in manufacturing. Manufacturing grew by 1.9% in the year so far and is expected to continue to grow at a healthy pace over 2015 – around the 1.7% mark.


Winners and losers from the lower oil price

There is a strong degree of sectoral divergence underlying some of the challenges currently facing UK manufacturers. The sector story is largely tied to the way the lower oil price has been feeding through the manufacturing supply chain.

Over the year, the mechanical and electrical equipment sectors have been a major drag on output growth. Both sectors are deeply embedded in the oil & gas supply chain and with North Sea projects cancelled and capital investment stalling, demand for capital equipment has dropped sharply.

Our forecasts suggest that the electrical equipment sector is expected to contract by 1.5% in 2015, although major infrastructure projects coming on stream could help counterbalance some of the negative impetus. The mechanical equipment sector is still set to grow by a modest 0.8% as waning demand from the oil & gas sector is set to be partially offset by strong investment intentions in the manufacturing sector as a whole.




On the other hand, sectors that use oil products as inputs into production, like chemicals and rubber & plastics, have been given a significant boost. The chemicals sector is now set to grow by 0.3%, in what otherwise would be a poor year, as falling input prices should increase output and margins. The rubber & plastics sector should see solid growth of about 2.5% this year supported by lower input costs and robust growth in the construction and motor vehicle sectors.

However, the oil price is not expected to be a main driving force for the performance of all sectors. Nevertheless, we anticipate some impact of the lower oil price to affect the transport sector mostly on the demand side. Motor vehicles are set for another year of robust output growth at 4.4% as the sector should benefit from a slow but steady turnaround in European demand and consumer spending supported by lower fuel costs.

The other transport sector – dominated by aerospace – should return to growth this year of around 5% after contracting in 2014. Lower fuel costs could increase demand from airline companies rushing to buy new aircraft while global oil prices remain subdued.


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