7 highlights from EEF's Mechanical Equipment Sector Bulletin

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Today, in partnership with Santander, we published our fifth sector bulletin report. This time, following on from our in depth looks at the automotive, aerospace, food and drink, and chemical sectors (we’re running out of sector here…) we turned our attention towards the less heralded mechanical equipment industry.

Regular blog readers will know this means one thing…a highlights blog outlining the 7 must-know things we have found out. So without further ado, here they are:

 

1) The sector makes...

Machines, machines, machines. Okay that may have been obvious but what might not be is the vast array of machines. From multi million pound industrial turbines and agricultural tractors, to the common office printer, the sector’s standing remains critical given that nearly every work place uses some form of machinery. The vast majority of these products are used as an investment to deliver an action or product wither in the domestic market or abroad.

 

2) The sector is highly cyclical

The mechanical equipment sector tends to experience sharper cyclical fluctuations than other branches of industry, due to its high dependence on investment in capital goods by other parts of the manufacturing industry. This was perhaps most evident in the wake of the financial crisis, when contractions in the whole economy led business investment to fall, and consequentially mechanical equipment output collapsed.

 

Cyclical

 

The cyclical nature of the industry represents a challenge for manufacturers, who need to take steps to remain operational during time of economic downturns, in order to benefit later on when the economy picks-up.

 

3) High degree of foreign ownership

It appears foreign investors are attracted to the UK mechanical equipment sector, with the sector having a much higher degree of foreign ownership than the manufacturing average. The top non-domestic investors come from the US, Germany and Japan.

 

4) Changing productivity dynamics

Now this is where it gets very interesting (and also quite complicated*). Our bulletin suggests that prior to the financial crisis the mechanical equipment sector saw large and consistent gains in productivity. Since then however, productivity growth has stagnated and the sector now increasingly relies on exchange rate devaluations to remain competitive. This is clearly a concern given exchange rate fluctuations are beyond the control of manufacturers.

Productivity

*check out Francesco’s nifty scatter plots and detailed analysis in the full report.

 

5) The mechanical equipment sector's trade position has deteriorated

Trade is essential to the make-up of the sector. In fact mechanical equipment is one of the most export intensive in UK manufacturing. That said, its trade position has deteriorated, as other countries, both developed and developing, have expanded their mechanical equipment industries at the expense of the UK. Indeed in 1996, each product segment of the mechanical equipment sector was running a trade surplus. Fast forward twenty years, and now three of the five market segments are running deficits, and the surpluses of the remaining two have been eroded considerably.

Evolution-in-trade-balances 

 

6) The Middle East represents a growing export market

The growing importance of large oil and gas industries in the Middle East has meant that exports to the region has grown by 117% from their level in 2000. The region therefore represent a growing market which manufacturers could look to take advantage of. It doesn’t come without difficulties though…Iran nuclear sanctions and the Arab Spring to mention just a few examples illustrating the region’s instability.

Middle-East-export-growth

 

7) Old and outdated? Think again – innovative and evolving

While the mechanical equipment sector is often described as an “old” industry, due to many of its products and processes being first invented over a century ago, this overlooks the fact that the sector has continuously evolved and moved with the times. Modern machinery successfully combines old principals with new technologies in fully integrated systems. The coming decades should see a continuation of these trends, as Industry 4.0, the IoT and Big Data continue to grow in importance.

 

You can find the full bulletin here. Keep your eye out for our next bulletin out in the summer…

Author

Economist

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