1) Manufacturing starts Q3 on a strong footing
Manufacturing output increased by 0.5% month-on-month and by +1.9% over the year in July according to the ONS. This marks a strong start to the third quarter after a weak performance in the first half of the year.
Figures are in line with EEF’s 2017q3 Manufacturing Outlook published earlier this week where output balances reached historic highs.
2) Capital goods driving the momentum in manufacturing activity
Growth in manufacturing output was mainly driven by capital good sectors which increased by +2.1% in July compared with the previous month. These sectors are continuing to benefit from the revival in investment both globally – and particularly in Europe – and in the UK with EEF's Manufacturing Outlook highlighting stronger investment intentions this quarter.
Growth was moderate in the intermediate good industries, posting +0.2% in July. By contrast, consumer-related industries contracted by -1.4% for consumer durables and -0.8% for consumer non-durables. This reflects the on-going squeeze on real incomes from high inflation and subdued wage growth.
3) Auto and pharma still volatile
July saw the output of the motor vehicles industry increasing by 13.7% over the previous month after a sharp contraction in the previous quarter. The ONS and the SMMT both pointed to the introduction of new models as a possible explanation to the high volatility the sector has been witnessing recently.
The pharma industry has also reported significant volatility in output in recent months. Output contracted by 7% in July compared with the previous month, following +1.2% in 2017q2, -9.3% in 2017q1 and +9.4% in 2016q4.
The high volatility in these two industries is likely to drag on the overall growth figure of the manufacturing sector as a whole.
4) Export volumes are up
Exports of goods (excluding oil and erratics) posted impressive growth at the start of the third quarter, increasing by 4.1% in volume terms in July over the previous month.
Interestingly, export prices are stabilising at high levels after they increased significantly following the sterling depreciation in the aftermath of the EU referendum. This means that the benefits of sterling depreciation are likely materialising in the form of improved margins on export sales.
Again, this is in line with EEF's Manufacturing Outlook. Margins on export orders continued to improve in the third quarter after a digging into negative territory last year.
5) Synchronized upswing in global markets means demand for UK goods is strong
The upward trend in exports to EU markets continued at the start of the third quarter. Exports of goods (exc. Etc.) to the EU increased by 3.8% in volume terms in July compared with the previous month.
Exports to non-EU countries were also up in July by 4.4% in volume terms, after a weak performance in the previous quarter.
This sounds repetitive. But we’ve been telling you this for a long time now. Our survey showed significant improvement in demand prospects in all overseas markets and the proportion of respondents saying there are no bright spots has been steadily declining for more than a year – pre-dating the referendum which prompted sterling’s dive.
EEF's 2017q3 Manufacturing Outlook was published on Tuesday. You can read the full report here.