Manufacturing Outlook 2018q3 - what's the sector story?

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On Monday Lee blogged on the key headlines from our 2018q3 Manufacturing Outlook report. This made for fairly pleasant reading, with our survey results pointing to a bit of a pick-up in manufacturing activity, and momentum. This should hopefully translate into a recovery in the official statistics, out later this month.

Output-and-orders 

Today I’ll dig a little deeper into the sector picture, outlining some of the key trends driving the results, and consequentially our own sector forecasts. We’ll kick things off with those sectors in the construction supply chain.

 

Construction related sectors on the up

The construction sector, following a very poor start to the year - a result of weather related disruption and liquidation of Carillion - has seen a bit of a revival over the past three months. This has supported a number of sectors in its supply chain, chief of which being the basic metals sector.

In fact the basic metals sector is one of the star performers this quarter, recording historically high output and order balances. This may come as a bit of a surprise given rising trade tensions and the risks that President Trump’s trade policy poses to the sector in particular. Yet for the time being, this is offset by strong order books, and an upward movement in prices, with the sector approaching the top of its business cycle following past weaknesses. That said, large contractions over the start of the year mean that despite these healthy results, we do not expect growth in official figures this year.

A similar situation is seen in the metal products sector, whose output balance remained broadly stable at a healthy level of 32%. Rubber and plastics – another key input into construction - is also set to feel the benefits next quarter. We expect both sectors to record growth this year, 1% and 0.4% respectively.

 

Electronics booming, electrical equipment floundering

The other standout performer this quarter comes from the electronics sector. While the basic metals sector’s performance was a little surprising, the strength in activity in electronics is not. The sector is riding high on a global boom with strong demand in particular emanating from Asia and the US. The strong performance in our survey is backed up by official data (and semiconductor sales), and we expect overall electronics to expand by a whopping 10% this year.

This is in stark contrast to electronics’ sister sector, electrical equipment, which has had a torrid time of it recently contracting by 5% and 6% over the opening quarters of 2018. As an investment good, the sector is likely to be suffering as demand begins to wane from key sectors, including mechanical equipment. We are forecasting a large contraction of 8.0% this year.

 

Mechanical easing but still expanding

Electrical equipment’s plight brings us onto the mechanical equipment sector. As the primary investment good in UK manufacturing (as well as an export intensive one) the sector had been enjoying a sweet spot over 2017 and early 2018 with the global upturn and weak sterling boosting growth. However momentum is easing. Ongoing uncertainty about the final Brexit deal, along with the sterling depreciation effect beginning to fade, means the sector is beginning to ease, as companies shun making larger investments for the time being. We are forecasting growth of 5.1% this year, which while healthy, reflects the strong year last year, and masks a weaker quarterly profile for the sector.

Sectors---18q3



What about the rest?

So far we’ve looked at the sectors that are heavily represented in our survey, but there are a number of interesting stories away from these sectors too.

The automotive sector for instance, following a number of years of healthy expansion in the wake of the financial crisis, continues to ease. A general saturation effect, combined with Brexit uncertainty and fall in demand for diesel cars, is hindering the sector. We expect a contraction this year. Elsewhere pharmaceuticals should bounce back after a poor year in 2017, despite ongoing uncertainties which have led some manufacturers to stockpile drugs. Food and drink should also tick along at a healthy pace, given the demand inelastic nature of its products.

Sector-forecasts

 

Overall

In our view, the key takeaway from our survey and readings in the official data is that there is some resilience in overall manufacturing activity, but momentum behind the upturn has eased. This has seen out manufacturing forecasts come down quite a bit to 0.9% and 0.5% this year and next. 

 

 

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