The slowdown in global growth and trade has been the focal point of discussion among economists over the past couple of years, not least on the EEF blog. The slowdown in China’s trade-intensive sectors – such as construction and manufacturing – has put an abrupt end to the commodity super-cycle, sending prices for all kinds of intermediate goods on a downward spiral.
Commodity exporting countries have been hurt the most but developed economies have not emerged unscathed either. Demand for the more high value-add capital goods powering Chinese factories has all but evaporated, while the collapse in the Brent crude price has led oil & gas companies around the world to can their capital expenditure plans.
All this sums up to bad news for export-focused sectors like UK manufacturing. But will 2016 see a continuation of these trends?
Exports have held up
While manufactured exports are far from booming, they have held up given the current economic climate. Manufactured exports were down slightly by 1.6% in Q1 2016 compared to Q4 2015. As ever, there are some important differences between the export performance of manufacturing sub-sectors:
Heavily commoditised sectors like basic metals have borne the brunt of global over-supply in raw materials. With China flooding global markets with steel at knock-down prices, UK basic metal exports have unsurprisingly contracted by 1.5%, albeit a better performance than current market dynamics would suggest.
The electronics sector – where a good chunk of output is intermediate goods such as electronic components and testing & measuring systems for capital equipment – saw one of the worst export performances in Q1, with exports down by 8% from Q4 2015. The sector has been hurt by the slowdown in Asia Pacific, a key market for electronic components, as well as slowing demand for industrial machinery.
On the other hand, sectors in the construction supply chain – non-metallic minerals, rubber & plastics and to a lesser extent metal products – saw exports grow healthily at the start of the year. This is mostly down to a hefty pick up in exports to the Eurozone, where the construction industry is forecast to return to growth in 2016 after consecutive years of contraction and a flat 2015.
Chemicals were the star performer in Q1 2016, with exports up a hefty 15% compared to Q4 2015. The sector has been buoyed by lower input costs – mostly due to the slump in the oil price – as well as the depreciation in the value of the sterling.
The slowdown in global manufacturing and oil & gas activity has been mostly felt in the investment goods sector. With manufacturers around the globe faced with spare capacity and oil & gas companies cutting costs and scrapping exploration projects, demand for capital equipment has been subdued. As a result, mechanical and electrical equipment exports fell by 1% and 3% respectively in Q1 2016.
Consumer goods exports have been performing well generally, supported by consistently strong consumer demand in the developed world and rising incomes in emerging markets. However, this quarter things look to have taken a turn for the worse.
Motor vehicle exports fell by 2.6% in Q1 2016, mostly the result of a 10% drop of overseas sales to the US market. With fundamentals in the sector strong and possible regulatory issues temporarily affecting sales, this outturn is likely to prove a blip with exports expected to return to growth in Q2.
The food and drink sector saw the biggest drop, with exports falling by 11%, as the slump in commodity prices continues to cut into manufacturers’ margins. Finally, pharmaceutical exports only saw only a marginal increase in exports in Q1, although we do expect a more robust pick up in exports as the end of the patent cliff means pharmaceutical companies will be rolling out a host of new products.
Over the past two to three years discussions around the UK’s export performance have revolved around the rising importance of emerging markets – most notably China – and the concomitant declining significance of markets such as the Eurozone. While it’s true that emerging markets are grabbing a larger and larger portion of the global economic pie, such claims appear to be overegged.
Indeed, a notable trend in the first quarter of the year is the surge in exports to the Eurozone at the same time that exports to China have been tailing off. Looking a bit further back, the data shows that exports to China saw a significant boost in 2014, picking up the slack from flat-lining exports to the Eurozone . This situation looks to have reversed since mid-2015. With the Eurozone back on the path to economic normalisation and China managing its structural economic slowdown, this trend is likely to persist in 2016.