EEF/BDO Regional manufacturing Outlook: Common themes across UK regions

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Last Friday, Tom Lawton, Head of Manufacturing at BDO, blogged on the release of our joint Regional Manufacturing Outlook 2016 report. The blog focused on five key take-aways from the report, highlighting the importance of manufacturing for regional economies. Today we will draw some of the common themes affecting the manufacturing performance of the UK regions, both before and after the EU referendum.


How do the regions compare?

The past year has seen the manifestation or continuation of a number of global economic trends, some supportive for UK manufacturing and others not. Low inflation has largely been the unifying theme; deflationary pressures have on the one hand propped up consumer-facing sectors but on the other put intense pressure on more commoditised industries. Topped with sluggish global growth weighing on demand from the UK’s key export markets, the net effect on the manufacturing sector has been negative.




Indeed, our regional round-up table compares the average balance for the main survey indicators over the past four quarters and a quick comparison with last year’s table reveals substantially more negative readings this time around. But the distribution of industries around the country means that these economic factors have played out differently in each region.


There are three key themes underlying manufacturing performance in the UK’s regions:

1.      Regions with a heavy exposure to oil & gas and metals production have struggled

2.      Regions with domestic focused industries and large transport sectors have held up

3.      Regions with a concentration of the food & drink and pharmaceutical sectors have seen a mixed picture


1.      Heavy exposure to oil & gas and metals production is bad news

Regions with a heavy exposure to the oil & gas industry and metals production have struggled over the past year. Much of manufacturing activity in Scotland is plugged into oil & gas supply chains and trends in output and orders have closely tracked the collapse in the global oil price since the second half of 2014.

The country also has a considerable exposure to metals production (around 11% of total manufacturing output), with the sector facing a double whammy from subdued demand from the North Sea and the collapse in global steel prices weighing on overall competitiveness.

These trends have played out similarly in the North East, with mechanical equipment – which supplies a good part of output to oil & gas – and metals production accounting for almost one third of the region’s total manufacturing output.

Still, conditions in these regions looked to be turning a corner pre-Referendum. With both global oil and steel prices gaining ground in 2016, we saw export orders ticking up in both regions in the first half of the year of the year.



2.      A focus on the domestic market and a concentration of transport sectors does the trick

Over the past year, two positive trends have been consistent across the manufacturing sector, both underlined by a low inflation environment boosting household disposable incomes. One is that companies selling to the domestic market have avoided the bulk of global headwinds faced by the rest of the sector. The other is that the transport sectors have seen sustained output growth.

The South East & London best exemplifies the former trend. The region has a concentration of high-value industries catering mostly to the domestic market, as well as a low exposure to the oil & gas and steel industries. This has positioned the region well to report positive trends in output, recruitment and investment.

Solid activity in the transport sector has kept output and orders in the East Midlands, West Midlands and the South West ticking over for the past year. All three regions enjoy a high concentration of motor vehicle and aerospace manufacturers.  Robust consumer demand and new models coming on stream have underpinned strong growth in motor vehicles, while long order books for aircraft means demand for aerospace manufacturers is all but secure over the next few years.




3.      Food & drink and pharmaceuticals make a mixed picture

Regions with a large presence of the food & drink and/or pharmaceutical sectors – like the East of England and North West – have seen a more varied picture. Both sectors had a subdued start to 2016 and as a result, these regions have been adversely affected, albeit to different degrees.

The North West has been the hardest hit – but this is likely to reflect developments in the beleaguered metals industry – the region’s fourth largest sector. The East of England has fared a bit better, likely down to a more diversified industrial mix in the region.

Nevertheless, both regions faced improving forward looking prospects pre-Referendum, with food & drink and pharmaceuticals on a strong growth path in 2016. The food and drink sector looked set to grow modestly this year, as the supermarket wars that took their toll on output over 2015 have come to an end. What’s more, the end of the patent cliff means pharmaceutical companies will be rolling out new products, boosting output and investment in the sector.




Has all this changed post-Referendum?

While the past year has seen performance in the manufacturing sector across most regions taking a step back, the picture was one of gradual improvement. The headwinds that have weighed on the sector – subdued oil & gas activity, steel plant closures and weakness in key export markets – were all dissipating. What’s more, strong fundamentals in the transport and pharmaceuticals sectors made for a positive picture going forward.

Post-Referendum, the recovery we were seeing in the manufacturing sector is under threat. Our results suggest that while the immediate impact of the EU referendum result on manufacturers is limited, confidence has taken a beating across the board and expectations about business prospects over the next six to twelve months are materially more downbeat.




All regions are planning for a more subdued demand environment, while all regions apart from the North West expect to invest less over the next year. Still, Brexit doesn’t come without its opportunities and manufacturers have cited the depreciation in sterling as a silver lining, likely to materialise in the form of increased demand from non-EU markets.

Overall, past performance and the regions’ industrial make-up are good indications of how manufacturers view the balance of concerns and opportunities post-Referendum. Manufacturers in the South East & London and Wales look better placed to ride the storm, while companies in the East of England, North East and South West are less sanguine about their ability to cope with this negative economic shock.


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