Manufacturing outlook - momentum down, but not out | EEF

Manufacturing outlook - momentum down, but not out

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Last week the Office for National Statistics confirmed an eighth consecutive quarter of growth for UK manufacturers. But over the past year, the pace of expansion has fallen back in each quarter. EEF latest Business Trends Survey, in partnership with DLA Piper, outlines how manufacturing has fared in the second quarter of this year and expectations going into the second half of 2015.

Our survey results show that we should expect more of the same from manufacturing over the next couple of quarters – that is growth, but at a more modest pace. The balance of manufacturers reporting an increase in output over the past three months has dropped to 5%; the lowest response balance since 2013q1. Last quarter’s expectations had anticipated something of a slowing in activity in the second quarter, but the outturn is weaker than expected.

UK orders trend down

While export levels have remained fairly statics over the past few years a buoyant domestic market has been an important prop for UK manufacturers. In the past six months the UK demand environment has become less supportive and a net balance of companies reported a fall in UK orders in the most recent quarter.


As we always stress, manufacturing is a diverse sector and the trend in orders reveals differing demand patterns across different sub-sectors. There is a notable weakness in UK orders across the metals and mechanical equipment sectors – industries that have a higher degree of exposure to North Sea oil and gas activity. The supply chain effects of the lower oil price were highlighted in our report last quarter and look set to persist over the coming quarters as investment plans are scaled back or remain on hold.

Consumer facing sectors such as motor vehicles and food and drink were more positive about their new order in take over the quarter.

But an improving European Outlook could help exports

Despite manufacturers’ predictions three months ago that a turnaround in export demand was in sight, responses in our most recent survey are flat over the quarter. However, more companies are starting to report an improvement in demand in European markets (see chart). This comes on the back of slightly stronger economic indicators across the region in recent months. The change in sentiment towards Europe was particularly marked in electronics and motor vehicles. This trend could finally contribute to a strengthening in export moving into the second half of this year.


Confidence edges down and investment plans follow

A mix of a softer domestic outlook and an uncertain path for export demand has pushed down overall confidence about business activity and the UK economy over the next 12 months. As our survey period straddled the general election, the (wrongly) anticipated wrangling over coalition talks could have been a factor.


Nevertheless, with the loss of momentum in recent quarters and more subdued confidence plans to increase investment levels and employees have fallen back. A balance of 3% of manufacturers report plans to increase capital expenditure, the lowest reported balance for five years. Forward looking employment balances have also hit a two and a half-year low. While this does signal a clear slowdown in both measures, it also follows a sustained period of strong growth as companies caught up with the replacement cycle and expanded their workforce to meet demand.

Growth forecast to continue

Incorporating the weaker than expected outturn in the official data for the manufacturing in 2015q1 and the weaker overall indicators from our survey has led to a downward revision to our forecast for manufacturing in 2015. We expect output to expand by 1.5%, down from 1.7% in our previous report.


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