Manufacturers remain resilient in face of Eurozone turbulence

07 June 2012

Britain’s manufacturers are remaining resilient and continuing to take advantage of growth in global markets, in spite of the increasing uncertainty in Europe according to a survey released today by the Engineering Employers' Federation (EEF) and business advisers BDO LLP. The survey showed positive responses on output across manufacturing over the past three months with manufacturers also expecting output to continue to expand over the next three months.

Lee Hopley

Investment balances have also remained firm, whilst demand for skilled staff continues to drive positive recruitment intentions. However, EEF added a significant caution that, despite the relative strength of the survey results, the continued political and economic uncertainty in the Eurozone and any possible deterioration in the European economy as a result, may yet impact significantly on manufacturers’ confidence and prospects.

Key findings
- Output and orders remain positive, but softer than last quarter’s expectations.
- Both UK and export orders balances gain ground.
- Sector divergence remains in evidence.
- Investment plans hold firm but cashflow concerns for SMEs
- Recruitment intentions continue two year positive trend
- Growth flat this year, accelerating in 2013.

Commenting, EEF chief economist, Ms Lee Hopley (pictured), said: “Manufacturers are holding steady and displaying the resilience and agility they have displayed in response to a number of unforeseen events in recent years. Despite the problems closer to home they are building on successful strategies to access growth opportunities in new markets.

However, the main risk to activity is still rooted in the on-going Eurozone crisis. While the growing political and economic uncertainty in the region has not significantly dented confidence as yet, it is far from clear what or when the end game might be. This could delay positive investment intentions being translated into a sustained recovery in capital expenditure, at least in the short term.”

Tom Lawton, head of manufacturing at BDO LLP, said: “The results from this latest survey show that UK manufacturing remains surprisingly resilient in the face of the combined headwinds of renewed Eurozone uncertainty and a very tight lending market. Exports seem to be holding up reasonably well supported by increasing trade with emerging markets which may well be critical as the Eurozone continues its downward spiral.

“Over the next few years the success of the sector will almost certainly depend on how quickly we can switch our export focus to the emerging growth markets and this will require a shift in thinking amongst many manufacturers. The results also show that the economic uncertainty appears to be hitting smaller companies hardest, causing cash flow problems amongst those with the shallowest pockets. Measures to help protect and support these companies must be made a priority or else we face the prospect of losing the type of innovative engineers for which the UK has become globally renowned. "

Output and order balances strengthened further in the second quarter of 2012 from the low seen in the last quarter of 2011. A balance of 20% and 17% of manufacturers’ reported output and orders had grown respectively, up from 19% and 13% last quarter. UK orders improved with a balance of 9% whilst export orders remained steady, with emerging markets likely to be compensating for the flat demand from Europe.

Continuing the trend seen in the last few quarters, there is continued divergence between individual manufacturing sectors. While most sectors reported a stronger quarter than in the first three months of the year, other transport remained the strongest on the back of demand from civil aerospace, whilst motor vehicles remains strong ahead of new models being introduced in the autumn.

Investment balances weakened slightly but remained positive with a balance of 15% said that they planned to increase capital expenditure in the next twelve months. Recent official statistics showed that manufacturing investment grew 5.2% in the first quarter of 2012, rebounding from negative growth at the end of 2011. However, cashflow could be a problem looking forward particularly for smaller firms with a balance of 5% of firms with less than 200 employees expecting their cashflow to deteriorate over the next three months, compared with 13% of larger companies expecting an improvement.

Recruitment intentions remained strongly positive, continuing the trend seen since the beginning of 2010, with a balance of 21% of companies indicating they increased their employment, up by 1% on the previous quarter. This was greatest amongst small firms.

Expectations for the next three months are generally strong with the balance of manufacturers in most sectors expecting orders to increase. All sectors were also more positive about export orders, with the exception of rubber and plastics. However, following the sharp contraction in manufacturing output at the end of last year, the sector is forecast to show a small year-on-year contraction for 2012 of -0.1% with GDP growth of just 0.2%.

The recovery is forecast to gain further momentum through the latter part of this year and into 2013, barring any further shocks with EEF forecasting manufacturing growth of 2.2% in 2013 and GDP growth of 1.8%