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EEF/BDO survey shows manufacturing slowing

06 December 2011

Manufacturing activity has fallen back in the last quarter in response to growing economic uncertainty in major markets, feeding through to an easing in investment and recruitment intentions, according to a survey from the Engineering Employers' Federation (EEF) and business advisers BDO. The Q4 Manufacturing Outlook survey showed that growth remained positive, but output and orders balances have dropped from historic highs at the beginning of the year to levels closer to their long-run average.

EEF Chief Economist, Ms Lee Hopley
EEF Chief Economist, Ms Lee Hopley

However, prospects are mixed by company size and sector and there is clear divergence in markets with exports continuing to grow but the domestic market flat.

Looking forward the survey shows clear concerns about future prospects with a contraction in order books expected in home and overseas markets in the next three months. As a result, EEF has downgraded its forecasts for manufacturing to 0.9% growth in 2012.

Commenting, EEF Chief Economist, Ms Lee Hopley (pictured), said: “Manufacturing has been a key pillar in the recovery so far and it looks like the sector will still end the year on the up with positive output and orders responses posted over the past quarter. However, short-term confidence has all but fallen away.

“The signs of caution that had been emerging through the second half of this year have clearly become more entrenched as global growth concerns have escalated. There are not only question marks over wider manufacturing prospects at the beginning of 2012, but also the exports and investment needed to underpin sustainable growth.”

Tom Lawton, Head of Manufacturing at BDO LLP, said: “Although exports have maintained a relatively strong performance in the quarter the continuing problems within Europe, which is by far our biggest export market, are clearly having an effect and generally increasing a feeling of nervousness and lack of confidence.

“However, despite this gloom manufacturing looks set to perform well in relation to other parts of the UK economy in 2012 and we would strongly encourage the government to increase the momentum of support for the sector in order to help rebalance and boost the economy. It seems clear that manufacturing has to be at the centre of the government’s future growth plans.”

The survey shows that after six quarters of near-record high responses, the balance of manufacturers seeing output and orders fell back to more normal levels with +12% of companies reporting increased output, and a balance of 8% reporting increased orders. This compares to 27% and 23% in Q3 respectively. Export orders have continued to drive much of this growth with +10% of companies seeing overseas demand continue to rise against a flat domestic market

By sector, the divergence in performance which had become apparent last quarter has increased in the last three months. Basic metals, rubber and plastics and electronics both reported negative output and orders balances. On the other hand, sectors like motor vehicles and mechanical equipment have experienced a strong quarter. Looking ahead to the next three months, this pattern looks set to continue with other transport in particular looking strongly positive, on the back of strong demand from civil aviation.

Investment and recruitment still remained relatively positive. A balance of +18% of companies reported taking on new employees, well above the long term average for the seventh quarter running. Whilst investment was still positive at +12%, it was down from +18% in the last quarter and, with cashflow being severely squeezed, there are clear risks to this being sustained.

Looking forward, the volatility that has hit the global economy in recent months, especially in the Eurozone, has had a marked impact on confidence with expectations broadly flat with a small balance (-1%) of manufacturers expecting orders to fall. In line with the deterioration in prospects for the Eurozone economy in particular next year EEF has reduced its forecasts for manufacturing growth from 2.2% to 0.9% in 2012.

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