The strong theme that comes from this year’s Executive Survey in partnership with Aldermore is that risks have become more prominent in manufacturers’ outlook for 2016.
The faltering confidence seen throughout 2015 - due to the backdrop of continued problems in Europe, the slowdown in emerging markets as well as continued weakness in the oil and gas sectors - is expected to continue into this year.
Whilst just under a quarter of respondents believe there are more opportunities than risks in 2016, more than two-fifths believe the opposite (see chart below). A change from expectations at the start of 2015. This is the case across manufacturing sectors and larger companies are more likely to expect more risks than opportunities.
So where do companies see risks to growth?
Significant movements in exchange rates continue to be a source of risk for 45% of companies. Not only can exchange rate movements impact on sales margins, they also can take their toll on export sales volumes and import costs as well as the issue of managing exchange rate volatility. Companies concerns are to be expected after large movements in the exchange rate in the past year.
Concerns about world trade growth and the strength of demand from both developed and emerging markets have become more prominent in the headlines over the course of 2015. The risk of economic volatility in companies’ major markets continues to be a risk for 39% of firms going into this year.
The squeeze on margins for manufacturers can come from all areas of business costs and 36% of respondents see upward pressure on business costs as possible for challenging growth in 2016. Digging into this area, upward pressure is expected to come from a broad range of sources: pay pressure is expected to remain; pension costs are also a potential source; compliance with regulation is also expected to provide upward pressure; and energy costs continue to be a worry for manufacturers as well as other input costs.
External finance poses a risk to business growth by only a small proportion of firms – 4% – however cashflow problems and changing payment terms (normally extensions) are regarded as more of a risk. Over a quarter of firms mention it as a risk and 13% see it as their top risk to growth, up five percentage points from last year’s survey. The issue could feed through to business performance by putting pressure on working capital and limiting funds for investment, for example.
An uncertain outlook
The myriad of possible risks for 2016 means an uncertain outlook for manufacturers. Whilst opportunities are present, as we will discuss later this week on the blog, potential challenges and uncertainty on whether risks will materialise is leading to a more subdued picture for the next 12 months.