Official manufacturing statistics show that output levels are currently little changed from those reported at the start of 2014. Could all that be about to change? Our latest Manufacturing Outlook Survey suggests that the sector is climbing out of the mire and a return to growth is on the cards later this year.
It’s been a difficult couple of years for UK manufacturers with weak global growth, a collapse in oil and gas investment, an uncertain recovery for construction and the crisis in the steel sector all taking their toll on our Manufacturing Outlook survey results and official statistics. Our latest survey suggest that these dampening factors are starting to bottom out and combined with some sectors that have weathered these challenges, output and orders are heading in a more positive direction.
Moving back to growth
While still negative for the fourth quarter running, the balance of responses across almost all of our major indicators showed another quarter of improvement in 2016q2 and are expected to do so again in the next quarter.
The past three months saw lingering weakness in the domestic market, concentrated mainly in the mechanical and metals sectors, both of which are still feeling the consequences of cancelled oil and gas investments. But these effects now look to have bottomed out. Nevertheless, demand from overseas still isn’t stepping in to fill the gap, despite companies’ reports of signs of improving demand conditions in European markets.
It is important to note that these trends haven’t been evident across all sectors in our survey. Chemicals, the transport sectors and food & drink continued their run of positive output and orders balances in the past three months and are more likely to be seeing stronger growth prospects in overseas markets.
Demand conditions across most industry segments now seem to be turning a corner. Although we have to base this on the working assumption of manufacturers that the UK will avoid the turmoil and uncertainty of Brexit. This underpins our forecast of a return to growth for manufacturing as whole in the second half this year.
Investment recovery set to lag
While almost all indicators are heading in the right direction, the one exception to this is companies’ investment plans. The balance of companies planning to raise capital expenditure plans over the next year fell further over the past three months and remains at its lowest level since the end of 2009. Smaller companies seem particularly cautious about investment and there are two possible explanations of this. Firstly the need for expected improvements in output and orders to be realised before investment increases follow. And the second is the upcoming EU referendum. While there are few concrete signs that this is having a tangible impact on the sector right now, the potential uncertainty may just be weighing disproportionately on small companies.
Overall, our survey results suggest that the worst may now be behind us. While not the most buoyant picture in recent years, a break from the deteriorating trend in 2015 should be cautiously welcomed. Not least because, the UK’s pursuit of better balanced growth and improved productivity needs a surer-footed manufacturing sector.