Manufacturing Outlook 18q4 - The sub-sector picture

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On Monday, we published the last Manufacturing Outlook of the year. I wrote about the key headlines here.

Today, we will take a look at the sub-sector picture.

Some gaps are gone, some appeared

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In the first blog of the week, we pointed out how output and orders declined but not at the same rate. Indeed, a gap between the two appeared and this is something not really seen for a while. According to our analysis, this is a hint on how part of the production was related to stockpiling activity rather than actual demand.

As we can appreciate from the graph the difference between orders and output is a constant amongst sub-sectors as well, with the only exception of electrical which is experiencing a pick-up after a very troubled start of the year.

Moreover, we also pointed out how a gap that instead existed – the one between export and domestic orders – has now disappeared.

However, the sub-sector situation is quite variegated, with sectors actually continuing to have an important gap between the two – such as mechanical and electrical equipment – and others having the opposite situation. In particular the effect of the US tariffs on steel and aluminium, but also the issues affecting the automotive sector in Europe, had a big impact on export orders for basic metals and metal products.

Also notable is the pick-up in the domestic markets for construction suppliers such as those in the rubber & plastics, electrical, and non-metallic minerals sectors. Builders had a couple of good quarters after a very weak end of 2017 and a disruptive beginning of 2018.

 

Not many ready to invest

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Employment and investment have also trended down from last quarter in line with what we have seen in the order and output picture.

In our previous blog, we highlighted how several companies are not investing heavily at the moment due to the high level of uncertainty surrounding the UK economy.

In terms of sub-sectors, the only two sectors pushing on investment are electronics and basic metals. The reason why they are investing is quite different and deserve an explanation.

The electronics sector has been the superstar of the year with a growth for 2018 set to be close to 13%. The sector had a quarter not too positive in terms of output and orders, however the low level of production is probably more related to some capacity constraints which have been highlighted more than once during the year. The high level of investment will help solving the capacity constraint problem to make sure the sector is able to deliver the desired output.

Basic metals is a different story. The sector is not experiencing its best year for the aforementioned reasons, however its business and investment cycle is usually quite long and it doesn’t always follow the output results in a very timely way.

 

Last year almost everyone grew, not this one

The narrative around 2017 was of a very positive year for manufacturing, but also for almost all the UK subsector. Indeed, only the pharmaceuticals sector was the big outlier with a sharp contraction in 2017.

In 2018, the situation became much more heterogeneous with several sectors showing the minus sign. Moreover, talking about contribution to growth, almost half of the 1.1% growth we are predicting for 2018 is related to the astonishing performance of the electronics sector.

Very positive also are the growth rates of transports excluding automotive and pharmaceuticals which bounce back after a bad 2017, and mechanical equipment. This last sector is actually downward trending after a spectacular growth of 9.3% last year and is set to contract in 2019.

For the Brexit year, we are forecasting a meagre 0.3% growth. The subdued performance is the reflection of a much extended degree of uncertainty, the slowdown of the world economy we are already seeing in recent numbers, and the difficulties reported by a crucial sector such as automotive which will have detrimental effect also for their suppliers – such as the metal sector.

As we highlighted in our latest bulletin, the motor vehicles sector is facing several problems related to Brexit which may heavily disrupt its super-integrated supplychain, but also the issues related to the “diesel-gate”, and the sharp contraction of car registration.

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