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Manufacturing recovery appears to be gathering pace

14 June 2010

A growing number of Britain’s manufacturers reported buoyant trading conditions over the past three months on the back of rising demand in overseas and UK markets, according to a survey published last week by the Engineering Employers’ Federation (EEF) and accountancy firm BDO LLP. The second quarter EEF/BDO ‘Manufacturing Outlook’ report reveals that the broad based recovery, which began at the end of 2009, has gathered pace. Output and orders balances hit their highest levels since the survey began in 1995, indicating that manufacturing’s contribution to the recovery looks set to continue over the coming months.

Greater confidence across the sector is starting to translate into recruitment, but investment balances continue to lag as uncertainty about the strength of future demand, availability of internal finance and concerns about business taxation combine to keep plans on hold. But a package of tax reforms in the Emergency Budget that continues to support growth will go some way to alleviating concerns.

EEF chief economist Lee Hopley says the steadily improving trends in manufacturing look set to continue in the coming months and that the upswing is being felt right across industry. “Manufacturers are pulling in more export orders on the back of a recovering world economy and a better outlook for the domestic market is giving companies some confidence to recruit again,” she says. ”But manufactures are very aware that economic headwinds could still pick up again as there are still risks to a sustained recovery. Great importance is now being placed on the need to rebalance the UK economy. In the short term this requires a Budget which delivers tax reform and deficit reduction in a way that provides some stability and gives manufacturers the confidence to invest.”

BDO head of manufacturing Tom Lawton agrees these are a good set of results, especially as the manufacturing sector is still getting to grips with the uncertainty of the new coalition government. “Manufacturers are now indicating that they want the government to deliver in five key areas: deal with the deficit, establish an environment that allows manufacturing to be competitive, provide specific support to mid-market manufacturers and create and support investment in emerging technologies but without forgetting the needs of the traditional manufacturer.

"But, British manufacturers have never waited for, or relied on, politicians and regulators to initiate change. The emerging economies provide a huge opportunity for UK manufacturing. Those businesses that understand their core capabilities and who work hard to nurture them whilst adapting to the rapidly evolving international marketplace could see growth on an unprecedented scale."

Over the last three months both output and new order balances were at record levels of +30% and +34% respectively (up from 8% and 2% in Q1.) The improvement in the orders balances have been driven by improvements in both UK and export markets. The balance on export orders of +23% is the highest on record. The balance on UK orders also rose to +24% - also a record - with the improving picture reflected across all sectors and regions.

Responses on employment over the past three months also turned positive in the second quarter and a balance of 15% of companies expect to recruit in Q3. However, investment intentions remained flat over the past quarter, after seven consecutive quarters of negative balances. The survey found that investment plans were being held back by a range of factors; in particular, 65% of companies cited uncertainty over domestic demand, 46% uncertainty over future tax changes, whilst over half cited lack of finance or decision by a parent company.

Companies expect the positive outlook to continue with respective balances of +22% of firms looking to increase output and +20% expecting increased orders.

The forecasts predict 3.5% growth in manufacturing both this year and next as output recovers from the depths of the recession. Engineering output, which fell by 15% in 2009, is expected to grow by 6.4% in 2010. Manufacturing saw similar surges in activity following the 1980s and 1990s recessions.

Of course, all this is very good news, but the government still has something of a controlling hand, despite Tom Lawton’s assertion that manufacturers don’t hold their collective breath waiting for politicians to bring about change.

There is that small matter of the Emergency Budget, a little over a week away, that we are all being gently prepared for. The Chancellor has a most tricky time ahead balancing the real needs of the economy with the aspirations of business. And while there is accord on national debt reduction, potentially punitive taxation and measures that could conceivably thwart this encouraging progress must be avoided – almost at all costs.

Les Hunt

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