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Manufacturing gets off to stronger start in 2012 as sentiment rebounds

12 March 2012

Wavering confidence at the end of last year has proven to be temporary as activity turns out stronger than expected at the start of this year, whilst short-term confidence has recovered to levels reported in early to mid-2011 according to a major survey released today by EEF the manufacturers’ organisation and business advisers BDO LLP.

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

Output and orders balances remained firmly in positive territory over the past three months against previous quarter’s expectations of broadly flat activity in 2012q1. There was a notable improvement in UK demand with the balance of manufacturers reporting an increase in domestic orders on a par with export orders. Sector differences, that have been evident since the middle of last year, still persist.

The most significant change reported in our survey over the past three months is the improvement in sentiment. Output expectations have returned to levels posted a year ago and confidence about orders from home and overseas markets has rebounded. Confirming the more positive outlook there has also been a pick in investment and recruitment plans compared with the previous quarter.

Commenting, EEF Chief Economist, Ms Lee Hopley, said: “Manufacturing indicators hit a soft patch at the end of last year as events in global markets weighed on confidence and held back orders growth in some sectors. But our latest survey confirms this was a temporary setback rather than the beginning of a more a worrying trend for both the sector and the economy more widely.

”The confidence shown in our survey again demonstrates the resilience of manufacturing in the face of a changing global outlook. But while this is feeding through to a continuing willingness to recruit and invest, there is still more that needs to be heard from government to ensure that this investment proceeds and generates much needed growth.”

Tom Lawton, Head of Manufacturing at BDO LLP, said: “Manufacturers seem to be reassured by strengthening output and forward order books and are looking forward to the next three months with more confidence. The shock from the Eurozone delivered at the end of last year seems to be subsiding and UK domestic demand has caught up with exports - the main driver of growth last quarter – to provide a more secure foundation on which to establish a sustained period of steady, albeit slow, growth.

“Economic indicators are improving and positive automotive industry news this week will help crystallise this optimism. However, the ongoing fragility in UK and European banking systems and economies and the lack of access to capital for SME’s continue to present longer term challenges for the sector. It is important to the overall recovery of manufacturing and the UK economy for the government to recognise the opportunity that improving sentiment in the sector presents and to do everything it can to support and nurture this growth.”

The survey shows that after following the drop in all response balances last quarter and the significant weakening in confidence for the beginning of 2012, the outturn in the quarter’s survey has been stronger than expected. The balance of manufacturers seeing output and orders rise increased to +19% and 13% respectively. This compares to 12% and 4% in 2011q4. UK orders balances improved to 7% from 0 last quarter 0 – level with the balance of companies seeing growth in export orders over the past three months.

By sector, the divergence in performance is still apparent. Mechanical equipment, metals products and other transport all reported strong positive output balances over the past three months. We saw a dip in output and orders across motor vehicles in the past quarter, but this is expected to be temporary with confidence reflected in robust forward looking responses.

Investment and recruitment still remained positive, with indicators on both improving relative to the previous quarter. A balance of +20% of companies reported taking on new employees, up from 18% last quarter and considerably better than the balance of +5% of manufacturers that had expected to be recruiting three months ago. Investment intentions also picked up with a balance of +18% planning to increase capital expenditure. This was despite some weakening in margins and another quarter of negative cashflow balances.

Incorporating the weak end to 2011 and the continuing volatility in the global economy, our forecasts for manufacturing growth this year have been revised down to a muted 0.5%. However, we anticipate some regained momentum in the latter part of the year, which will translate into stronger growth of 1.8% in 2013. Across the economy as a whole we expect GDP to expand by 0.2% in 2012 and 1.8% in 2013.

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