Today we published our Manufacturing Outlook report, in partnership with BDO. And continuing the flow of positive news about the sector and the upbeat sentiment reported in our survey since the start of the year, manufacturers are marching into the second half of 2017 with rising output levels and fuller order books. Here’s a rundown of what’s happening and why.
If you only have time for the headlines – here they are:
- Output and orders balances bounce back to historic highs
- Export sales go from strength to strength, but UK demand holds firm too
- EU continues to be most cited market supporting sales growth
- Consistently positive picture across sub-sectors
- And all sectors report positive recruitment and investment balances
- Pushing investment intentions to a 10-quarter high
- Another ripple of price increases is coming following further £ fall
- Shaking off Brexit worries? Not entirely, confidence about UK economy outlook in the year ahead drifts lower
- We agree, GDP forecast at 1.3% in 2018, manufacturing at 0.5%
Balance of companies reporting higher output levels on the up
And so to the detail. After tailing off a tad in the second quarter the balance of manufacturers increasing production levels in the past three months was back on the up – hitting a record high and exceeding last quarter’s expectations.
These positive output trends were apparent across all manufacturing sub-sectors and in all UK regions – something of a rarity. We see a combination of factors driving this broad based improvement. From a pick-up in construction activity after the election-related wobble in q2 spurring output in supply chain sectors such as rubber and plastics and metal products to the strength of global manufacturing activity boost demand for investment goods.
But after a dismal run, the performance of basic metals this quarter stands out. Global demand, the weaker sterling, increased metal prices and the construction pick up finally providing the best of all world for the sector.
Report of sterling induced boost only half the story
The export picture is clearly an important component of this success story. Some headlines covering our survey in press this morning zero in on the level of sterling as the reason. We continue to argue that this is only part of the story.
Remember sterling’s plunge in 2009? This brought relatively little benefit to exporters – this time around the rest of the world is buying. Global manufacturing indices have been on the rise since the start of the year, with the eurozone PMI, for example, hovering at 74-month highs over the summer.
Our survey asks manufacturers about demand prospects in their 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.
There is however, another issue (isn’t there always). The nature of supply chains means that as orders for UK manufacturers rise companies are sucking in more imported components and raw materials, putting upward pressure on prices as companies look to minimise the squeeze on margins. And with the pound under further pressure in the aftermath of the snap election, a further ripple of price increase to set to come this year.
Sector should see solid activity levels over the rest of this year
The robust external picture should see new order in-take and production levels hold up in the final months of this year, with our forward-looking balances indicating expectations of solid activity levels in q4.
Beyond that, companies remain relatively optimistic about their own business prospects. Our confidence indicator – a gauge of firm-level growth expectations in the next 12 months – edged higher for the second quarter running. Busy factors and solid confidence levels are inevitably translating in the need for more people and a bit more investment.
Confidence about the UK economic outlook looks a bit shakier. The consequences of higher inflation on real incomes and consumer spending has not escaped manufacturers and they are more cautious about the resilience of the UK economy in the next 12 months.
We should see manufacturing contribute to growth in the official data
Our Outlook report adds to the weight of positive survey data for the sector, the question is will official statistics line up? We expect so. There was a divergence between official stats and surveys in q2 with the former pointing to a fall in output in the three months to June. As we reported previously automotive weakness was a big contributing factor, we’ve also seen a lot of volatility in pharma over the past year.
Updated GDP and manufacturing forecasts
Our forecasts for manufacturing account for the poor q2, but we have pencilled in growth for the remainder of this year, which should take output 1% higher in 2017. This is likely to tail off somewhat in 2018, but our expectation is for a muted 0.5% expansion.
We’ve made no material changes to our expectations for the UK economy over the remainder of this year and next, with growth projected at 1.6% and 1.3% respectively.