MANUFACTURING OUTLOOK€¦ · Manufacturing Outlook September 2013 1 ob o: 15732 Proof Event: 7 Black Line Level: 0 Park Communications Ltd Alpine Way London E6 6LA Customer: EEF

Job No: 15732 Proof Event: 7 Black Line Level: 0 Park Communications Ltd Alpine Way London E6 6LA

Customer: EEF Project Title: Manufacturing Outlook August 2013 T: 0207 055 6500 F: 020 7055 6600

MANUFACTURING OUTLOOKSEPTEMBER 2013

EEF’s snapshot survey of business conditions in engineering and manufacturing companies

In partnership with



Contents

Foreword 1

Introduction 2

Manufacturing roundup 3

Recent trends 4

Sector trends 6

Regional trends 7

Economic environment 8

Future trends 10

Sector forecasts 11

Manufacturing Outlook September 2013 1





ForewordWelcome to the third edition in 2013 of Manufacturing Outlook, our quarterly report on the trends in UK manufacturing produced by EEF in partnership with BDO. This quarter’s survey continues the recent trend of strengthening indicators in manufacturing and across the wider economy.

UK GDP picked up in the first half of this year and what was notable about the official statistics was the broad based nature of growth. On the output measure, manufacturing, construction and services were all positive contributors to growth. And survey indicators, including our latest Business Trends Survey, point to continuing expansion in the second half of this year.

Last quarter, our survey pointed to an emerging recovery in manufacturing with output and orders balances moving back into positive territory after a challenging 2012. Industry prospects have brightened considerably over the past three months, with output balances hitting a three year high and export balances at their strongest level for two years.

Moreover, positive responses can be seen across all sectors reported in our survey and there is growing confidence that improving trading conditions will continue into the final months of this year.

While a pick-up in domestic orders has been important for manufacturers over the past few quarters, economic news from overseas markets has also taken a turn for the better in recent months. Prolonged weakness in Europe has weighed on UK exporters for several years, but the eurozone returned to growth in the second quarter of this year. And while it is still early days in the region’s recovery, survey evidence from core and periphery countries shows activity has perked up in the third quarter too.

Greater optimism about the sectors prospects is supporting the strongest investment intentions we’ve seen in six years. This is particularly important given the disappointing performance of business investment since the end of the 2008/09 recession. While business investment posted a modest 1% growth in the second quarter of 2013, there is still a long way to go to make up the ground lost since the investment peak at the beginning of 2008.

While the signs of recovery that have emerged so far this year are positive, the need for better balanced growth from net trade and investment remains a necessity. As companies become more confident about their growth prospects, we need to see this translate into commitments to replace old equipment and invest in new capacity, and for this to take place in the UK. For this to happen we need on going action to ensure the UK is a competitive location for manufacturers to invest and grow.

Lee Hopley, Chief Economist, EEF Tom Lawton, Head of Manufacturing, BDO LLP




• Output balances rebound strongly.• Orders improve, led by strengthening domestic

market.• Recruitment steady, but investment plans hit six

year high.• Manufacturers optimistic about the next three

months.• Forecasts for manufacturing revised up in 2014.

Since our last survey, economic data has been pointing to a steady improvement in conditions across the UK. Both GDP and manufacturing output expanded by 0.7% in the second quarter, exports of goods and services grew at their fastest pace since the end of 2010 over the same period and business investment also looks like it may have finally turned a corner. A number of other surveys covering all sectors of the economy point to the recovery gaining momentum in the second half of 2013.

Across manufacturing, our latest Business Trends Survey confirms this strengthening trend. In 2013q2, our survey pointed to an emerging recovery for manufacturing, with most indicators seeing an improvement compared with the previous quarter. And in the past three months, output and orders balances picked up strongly with responses coming in firmer than companies were expecting three months ago.

At 32%, the balance of companies reporting increased output levels over the past three months was the strongest recorded in three years. The total orders balance came in at its highest level since 2011q2, while responses on export sales hit a two year high.

Following on from the broad based improvement across all sectors we reported in the previous quarter, output balances were strongly positive in all parts of manufacturing. This is the first time we’ve seen consistently positive sector balances since 2012q2. There is also widespread confidence that this trend will continue into the final months of this year. Overall, a balance of 28% of manufacturers expects output to grow in the next three months – the strongest balance since the start of 2012 – and there is increasing optimism about prospects in export markets.

In line with a strengthening outlook, recruitment has continued, particularly amongst SMEs, over the past quarter and a positive balance of companies is planning to increase headcount in the next three months. However, it is the improvement in investment intentions which stands out in the quarter’s survey. At 24%, the balance of companies planning to increase capital expenditure over the next year is at its strongest for six years.

Some indicators have remained largely unchanged in the past three months. The balance of responses on UK prices dipped slightly from 3% to -2%, while export price balances nudged higher from 0 to 1%. There was a modest improvement in both UK and export margins over the quarter, but both remain in negative territory. Manufacturers are not reporting expectations that either pricing power or profit margins will change markedly in the next quarter.

We expect manufacturing output to record a modest decline of 0.5% in 2013, but our forecast for growth in 2014 has been revised up to 2.1%. This year the strongest performing sectors will be transport, but gains should be broad based in 2014, with sectors such as metal products and non-metallic minerals returning to growth. Forecasts for GDP have also been revised up, both this year and next, to 1.2% and 2% respectively.

Headline survey results% balance of change

Past 3 months Next 3 monthsOutput 32 28Total orders 27 30Employment 12 16Export prices 1 -2Export margins -1 -5Cashflow 11 17

Source: EEF Business Trends Survey

Economic data during survey period31 July – 21 August

Start End€/£ 1.14 1.17$/£ 1.52 1.57£ index 79.3 81.9Oil price (Brent Oil $/bl) 107.89 110.82

Source: Bank of England and Energy Information Agency

Key economic forecasts% change except where stated

2011 2012 2013 2014 2015GDP 1.1 0.2 1.2 2.0 2.4Inflation – CPI 4.5 2.8 2.6 2.0 1.8Inflation – RPI 5.2 3.2 3.1 2.9 2.8World trade 6.4 1.8 1.5 4.7 6.0Base rate (%) 0.5 0.5 0.5 0.5 0.5

Source: Oxford Economics

Introduction






Chart 2

Non-EU exports continue to grow strongly as deficit narrowsGoods exports less oil and erratics to EU and Non-EU countries, £ millions

25000

27000

29000

31000

33000

35000

37000

39000

41000

2013q2

2013q1

2012q4

2012q3

2012q2

2012q1

2011q4

2011q3

2011q2

2011q1

2010q4

2010q3

2010q2

2010q1

£m EU Non-EU

Source: National Statistics

UK goods exports hit a record £78.4 billion in 2013q2 with sales of aircraft in particular making a strong contribution in June. The overall deficit in goods was £24.9 billion, down from £26.5 billion in 2013q1. Exports outside the EU rose above £40 billion for the first time and the UK’s trade surplus with the U.S. grew as exports increased 3.3% while imports marginally fell. Over a longer-term perspective, trade (both imports and exports) have been relatively flat for most of the past two years – exports grew only 0.9% in 2012 – after a sharp rebound following the recession.

Chart 1

Does 2013q2 mark the turning point in a challenging period for the sector?Index of Manufacturing, 2010 = 100

98

99

100

101

102

103

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-1

2

May-12

Mar-12

Jan-12

Nov-11

Sep-11

Jul-1

1

May-11

Mar-11

Jan-11


Manufacturing output finally appeared to turn a corner in 2013q2 with output increasing 0.7% on the quarter on the back of strength in pharmaceuticals, transport equipment, and electrical equipment. Output contracted 1.7% in the 2012 year overall and this indicates how challenging the last couple of years have been for the sector, which has been faced with weak European markets and subdued domestic consumers. June was a particularly encouraging month with monthly output up 2.0%. Strength looks to have continued into the third quarter with the PMI reading for July at a 28 month high of 54.6.

Chart 3

Manufacturing employment growth starting to slow?Change in number of people in employment in the manufacturing sector, 000s

-60

-40

-20

0

20

40

60

80

2013q1

2012q4

2012q3

2012q2

2012q1

2011q4

2011q3

2011q2

2011q1

2010q4

2010q3

2010q2

2010q1

000s


Employment in manufacturing has enjoyed something of a renaissance since the major recession with the first sustained increases in employment overall since 1998. This has occurred at the same time as capital investment has remained subdued. However, the strong surge in 2012 does appear to be tailing off and in our survey this quarter, only small manufacturers indicated intentions to recruit at the same time as investment intentions increased strongly. This may signal an imminent shift in the sector towards a greater reliance on capital to increase capacity rather than labour, which is more consistent with the long-term trend.

Manufacturing roundup




Chart 5

Domestic orders more positive than export orders% balance of change in orders in past three months


Both export and domestic order balances have seen a solid rebound this quarter, also exceeding forward looking expectations reported last quarter. However, unlike the recovery in 2010, the domestic orders balance is stronger than the export orders balance and has been for the past four quarters. This suggests that we are seeing more of a domestic led recovery this time around. Domestic orders were stronger than export orders in all sectors except one – export orders were slightly stronger in the mechanical equipment sector, which is one of the more export intensive manufacturing sectors.

-60

-50

-40

-30

-20

-10

0

102030

40

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

% Domestic Export

Chart 4

Output and orders balances back to 2010 levels% balance of change in past three months


More manufacturers reported an improvement in output and orders in the past three months, with balances rising back to the level we saw early in the post-recession recovery in 2010. In all manufacturing sectors, a positive balance of companies said output and orders had increased in the past three months, showing this recovery to be very broad based across the sector. The strongest positive balances were reported in the electrical equipment and motor vehicles sectors. Balances this quarter exceeded the forward looking balances that manufacturers reported last quarter and resonate with the signs we have seen in recent official data for the wider economy.

-60

-50

-40

-30

-20

-10

0

102030

40

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

% Output Orders

Chart 6

Margins improve once again % balance of change in margins in past three months


Margins improved again this quarter with balances for both domestic and export orders reaching the highest they have been since the first half of 2011. The export margins balance was more positive than the domestic margins balance over the past three months, although the majority of companies, 70% and 78% respectively, reported no change in both domestic and export margins. The balance of companies reporting margins worsening was much higher for larger firms, both domestically and overseas. Electrical equipment and basic metals manufacturers reported the most negative margins balances in the past three months, with motor vehicles and metal products reporting the most positive.

-45-40-35-30-25-20-15-10

-505

10

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

% Domestic Export

Recent trends






Chart 7

Employment balances hold steady% balance of change in employment in past three months


Recruitment balances held steady with a balance of 12% of companies reporting that they had increased employment in the last three months, up from 11% last quarter. Smaller companies were responsible for all of the growth in employment this quarter; a balance of 3% of larger companies reported employment had decreased in the last three months. Unlike in previous quarters, all sectors posted positive employment balances and the rubber and plastics sector had the strongest positive balance this quarter. Basic metals saw the biggest improvement, with a balance of 28% of companies saying they increased employment in the past three months after a balance of 9% reported employment decreased in q2.

-50

-40

-30

-20

-10

0

10

20

30

40

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

%

Chart 8

Investment plans bounce back% balance of change in investment plans


Investment intentions have rebounded this quarter reaching the second highest level seen in the history of this survey. A balance of 24% of companies said they are planning to increase their capital investment in the year ahead, up from a balance of 7% last quarter. This pickup in investment plans was driven by small and medium-sized companies and may be a sign that companies are concerned about capacity as output and orders start to gather pace. In contrast, larger companies on balance indicated no change in their investment intentions. Most sectors plan to increase investment on balance, with the metal products sector posting the strongest positive balance for investment intentions in the year ahead.

-50

-40

-30

-20

-10

0

10

20

30

40

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

2007q3

%

Summary: past three months% balance of responses (% up minus % down)

2011 2012 2013q2 q3 q4 q1 q2 q3 q4 q1 q2 q3

Total output 28 27 12 19 20 4 0 -1 12 32UK new orders 19 12 0 7 9 -6 -4 -7 3 20Export new orders 28 23 10 7 11 2 -8 -7 1 15Total new orders 30 23 4 13 17 3 3 -3 7 27Employment 24 20 18 20 21 16 0 4 11 12Capital expenditure plans 18 18 12 18 15 15 10 13 7 24Average price of domestic orders 16 9 6 8 8 -1 -6 1 3 -2Average price of export orders 16 10 6 5 4 -5 -8 -2 0 1Margins on domestic orders -13 -21 -22 -12 -14 -19 -18 -10 -8 -7Margins on export orders -4 -11 -9 -17 -14 -23 -21 -11 -7 -1Levels of cashflow 0 7 -9 -3 -3 2 -8 2 0 11





Chart 9

Basic metals moves into positive territory% balance of change in output


As with last quarter’s Business Trends Survey, most sectors once again posted an improvement in the output balance for the past three months. This quarter, however, companies in the basic metals sector also reported increased output, with a balance of 20% of companies saying that they had seen growth in the last three months. This was well above expectations reported last quarter and reflects improvement in a range of areas including increased orders – particularly domestic orders – and reduced pressure on margins. -20

-10

0

10

20

30

40

50

60

Moto

r veh

icles

Rubber and plasti

cs

Electr

onics

Electr

ical

Met

al pro

ducts

Mec

hanical

Basic m

etals

2013q2% 2013q3 next three months

Chart 10

Investment intentions strengthen for most sectors% balance of change in investment plans (next 12 months)


The positive investment intentions reported in this quarter’s survey were noted by companies in almost all sectors. Investment intentions were particularly strong amongst metals and mechanical equipment manufacturers with balances of 35% and 25% of companies in these sectors respectively reporting the intention to boost capital expenditure in the next twelve months. The only sector not to report positive intentions was electronics, where a balance of 8% of companies said they expected to reduce capital expenditure in the next twelve months; this was down from last quarter, when companies in the sector said that they expected to increase investment.

-20

-10

0

10

20

30

40

50

Motor V

ehicles

Rubber and plasti

cs

Electronics

Electrica

l

Metal p

roducts

Mechanica

l

Basic m

etals

2013q2% 2013q3

Sector summary% balance of responses (% up minus % down)

Past three months Next three monthsOutput Total orders Employment Export price Cashflow Output Total orders Employment Export price Cashflow

Metals 20 28 16 0 5 33 36 28 -8 19Metal products 32 29 18 3 14 27 30 4 -6 22Mechanical 32 24 12 2 9 23 22 13 -3 12Electronics 20 13 20 -8 13 43 43 14 17 21Electrical 42 35 16 -3 12 30 21 18 0 -13Motor vehicles 44 39 17 6 38 41 47 47 0 57Other transport* – – – – – – – – – –Food and drink* – – – – – – – – – –Chemicals* – – – – – – – – – –Rubber and plastics 40 78 30 0 30 56 38 11 0 22Non-metallic mineral products* – – – – – – – – – –

* Insuffic ient data Source: EEF Business Trends Survey

Sector trends






Chart 11

Output balances improve in all regions% balance of change in output in past three months


Every region saw an improvement in its output balance in this quarter’s Business Trends Survey. For the second quarter running, the South East and London was the strongest region, with a balance of 57% of companies saying that they saw output increase in the past three months. As well as strong output balances, companies in all regions also reported positive order balances, although – in contrast with the general trend – companies in the North East said UK orders were flat.

-10

0

10

20

30

40

50

60

70

North East

North W

est

Yorks

& H

umber

East Mids

West Mids

South W

est

Eastern

SE and London

2013q2% 2013q3

Chart 12

All regions expect output growth to continue% balance of change in output in next three months


Not only did the balance of companies in all regions report growth in the last three months, but this is also expected to continue for all regions in the next three months. Companies in the East of England reported the strongest expectations, with a balance of 69% saying that they thought output would increase in the next three months. Companies in the North East reported the least positive expectations. As with the past three months, companies in the North East reported weaker domestic orders than all other regions, with only 5% of companies expecting these to grow, compared with balances over 20% in every other region.

0

10

20

30

40

50

60

70

80

North East

North W

est

Yorks

& H

umber

East Mids

West Mids

South W

est

Eastern

SE and London

2013q2 2013q3%

Regional summary% balance of responses (% up minus % down)

Past three months Next three monthsOutput Total orders Employment Export price Cashflow Output Total orders Employment Export price Cashflow

SE and London 57 31 31 8 36 36 54 15 0 29Eastern 38 54 15 0 8 69 69 23 10 23South West 38 33 -13 -7 7 20 29 -7 0 14West Mids 51 42 34 3 18 38 40 17 -6 14East Mids 50 55 41 -6 0 50 33 24 0 20Yorks & Humber 31 23 12 -9 -4 40 42 16 -9 16North West 25 35 40 14 55 41 39 33 8 29North East 33 24 24 -12 -15 10 20 15 -12 19Scotland 19 21 3 -1 14 10 12 0


Regional trends




Economic environment• Growth strengthens in 2013q2 with signs this

will continue into the next quarter.• New Bank of England Governor turns to

forward guidance to keep long rates low.• Rebalancing has not yet taken hold.• Better signs internationally as Europe stabilises.

Momentum starts to build behind recoveryGDP growth strengthened according to the ONS’s first estimate for 2013q2 with an expansion of 0.7% quarter on quarter. Importantly, all major areas of the economy, including manufacturing, recorded growth. After a faltering period during 2011 and 2012, some momentum appears to be building in the UK economy.

Indicators of activity at the start of 2013q3 have been strongly positive for manufacturing, construction, and services according to the Markit/CIPS purchasing managers indices. July readings were at 54.6, 57.0, and 60.2 – representing 28, 37, and 79 month highs respectively. The manufacturing reading fits with our own survey this quarter.

Chart 13

Growth builds but rebalancing remains elusive% quarter-on-quarter contributions to growth and overall GDP growth

2013q2

2013q1

2012q4

2012q3

2012q2

2012q1

Households Government Investment Trade GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0%


Rebalancing still elusiveThe trade deficit narrowed in 2013q2 as UK goods exports rose to £78.4 billion – the highest on record. Goods exports outside the EU were up 7.5% to over £40 billion. Despite this performance, the rate of growth of both imports and exports has been relatively flat for most of the past two years after previously rebounding strongly following the recession. Business investment increased 0.9% in

2013q2 relative to 2013q1 but it still remains a quarter below its pre-recession peak.

Overall, despite the return to growth, the economy has some way to go before any rebalancing can be said to be underway. Our forecasts for GDP growth this year are for growth of 1.2% accelerating to 2.0% in 2014, with investment making a more positive contribution than in recent years.

The still-precarious nature of the UK recovery and relatively stable inflation over the past year means the new Governor of the Bank of England Mark Carney has gone further than his predecessor in trying to dampen down expectations of future MPC rate-tightening.

In August, the MPC issued explicit ‘forward guidance’ suggesting monetary conditions will remain accommodative bar a surge in inflation or an emerging asset bubble while unemployment remains above 7%. However, despite on-going loose monetary policy, longer-term interest rates on government bonds have been drifting up following similar moves in the US. Initial market reaction suggests the MPC may have to further bolster its resolve to ensure this has an impact on long-term rates – important because the recovery can still be hurt by prematurely increasing interest rates.

Chart 14

Signs of international recovery and stabilisation?% quarter on quarter change in GDP

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2013q4

2013q3

2013q2

2013q1

2012q4

2012q3

2012q2

2012q1

%United States Japan Eurozone


Recovery continues in the U.S. and Japan as China and the EU stabiliseEuropean prospects have improved since last quarter following stronger than expected growth results for 2013q2 and positive lead indicators for 2013q3.






Strengthening household sector demand in France and Germany and a moderating pace of contraction in southern Europe were the main drivers of growth. Germany recorded growth of 0.7% and France 0.5% leading the overall eurozone to finally pull out of recession with 0.3% growth in the three months to June 2013.

Prospects for the remainder of the year remain fairly muted as the southern countries continue to struggle with their public finances. France and the eurozone overall are expected to contract for 2013 as a whole despite recent performance, and Germany is expected to grow only modestly at 0.4%.

The US economy performed better than expected in the second quarter, growing at an annualised pace of 1.7% but growth in the first quarter was revised back. Consumer spending growth appears to have slowed a little although second quarter estimates were still ahead of most economists’ expectations. The impact of public sector spending cuts was much less severe in the second quarter than the first and, with the economy strengthening, the general view is that the worst of public sector consolidation is now behind us.

The housing sector in the US continues to strengthen and, although the trade deficit widened in June, this is seen as a sign of US strength relative to other economies. Trade-focused sectors in the U.S. economy, such as manufacturing, continue to report strong orders. With this in mind, and the unemployment rate set to fall as the recovery gathers steam in the second half of 2013, most economists expect that the Fed will begin to taper its programme of asset purchases from September (hence the drift up in longer-term interest rates). We expect US GDP growth of 1.6% in 2013 increasing to 3.1% in 2014.

Business investment in Japan slowed in 2013q2 for the sixth straight quarter but growth in consumer and government spending helped sustain the recovery initiated by the accession of Shinzo Abe to the Japanese Prime Ministership late last year. The government and the central bank are both focused on raising the Japanese inflation rate in an attempt to boost growth. Early signs are encouraging with profits, employment, and lending to individuals all up. The difficulty will be introducing sustained improvements in competitiveness while avoiding an adverse market reaction to Japan’s large public debt and deficit. We expect the Japanese economy to grow 1.8% in 2013 and 1.4% in 2014.

The Chinese economy is showing signs of stabilisation after a slowdown in the first two quarters of 2013 following efforts by the authorities to alleviate strained conditions of indebted companies and local governments. Industrial production and trade numbers in recent months have come in stronger. Growth is expected to be slower this year than in previous years at 7.2%. Authorities are prepared to tolerate slower growth in order to reorient the economy away from an excessive reliance on debt-fuelled investment (making up nearly half of GDP growth) and exports.

UK Economic forecasts% change except where stated

2011 2012 2013 2014Trading environmentExchange rate (€/£) 1.15 1.23 1.17 1.16Exchange rate ($/£) 1.60 1.59 1.53 1.44Exports 4.5 0.9 2.3 3.2Imports 0.3 2.8 0.1 2.5Current account (% GDP) -1.5 -3.8 -2.9 -2.4Output Manufacturing 1.8 -1.7 -0.5 2.1GDP 1.1 0.2 1.2 2.0Costs and pricesAverage earnings 2.3 1.2 1.6 3.0Oil price (Brent Oil $/bl) 111.3 111.7 107.1 102.7EmploymentManufacturing (000s) 2,553 2,625 2,608 2,590Rest of economy (000s) 31,527 32,119 32,318 32,509Unemployment rate (%) 8.1 8.0 7.9 7.9

Source: Oxford Economics and EEF

International Economic forecasts% change except where stated

GDP Inflation2012 2013 2014 2012 2013 2014

France 0.0 -0.1 0.7 2.0 1.1 1.6Germany 0.9 0.4 1.6 2.0 1.8 1.9Japan 2.0 1.8 1.4 0.0 0.0 2.0U.S. 2.8 1.6 3.1 2.1 1.5 2.1Eurozone -0.5 -0.6 0.9 2.5 1.6 1.6China 7.8 7.2 7.1 2.6 2.4 3.0India 5.1 5.0 6.1 9.3 10.7 6.4World 2.5 2.0 2.9 3.6 3.2 2.4





Future trendsChart 15

Domestic sales balances set to outperform exports in q4% balance of change in orders in next three months


One of the characteristics of the early recovery in 2010 and 2011 was weakness in the domestic market being offset by stronger export prospects. Over the past year we have seen somewhat of a turn-around in the profile of demand, with greater strength from the domestic market relative to overseas markets. Looking ahead to the next three months, companies expect orders from both domestic and export markets to increase on balance, with UK demand expected to continue to outweigh demand overseas. Despite the variation in where demand is expected to come from, manufacturers expect pressure on domestic and export margins and prices to be largely unchanged from last quarter.

%

-50

-40

-30

-20

-10

0

10

20

30

40

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

Domestic Export

Chart 16

Recruitment expected to pick up moderately% balance of change in employment in next three months


One of the puzzles of the past three years has been the strong employment in the economy that has persisted despite weak output growth. In 2012, manufacturing employment grew for the first time since 1998. Employment balances slowed in the second half of 2012 and, while expected to strengthen in the next three months, it is expected to remain below the average employment balance reported from mid-2010 to mid-2012. A balance of 16% of companies expects to increase employment in the coming three months. As with the last three months, smaller companies have reported stronger intentions to increase employment in the next three months than larger companies.

%

-50

-40

-30

-20

-10

0

10

20

30

40

2013q3

2013q1

2012q3

2012q1

2011q3

2011q1

2010q3

2010q1

2009q3

2009q1

2008q3

2008q1

Summary: next three months% balance of responses (% up minus % down)

2011 2012 2013q2 q3 q4 q1 q2 q3 q4 q1 q2 q3

Total output 27 22 0 28 16 15 4 22 23 28UK new orders 13 12 -9 13 7 8 -4 12 12 24Export new orders 20 19 -2 17 15 3 3 16 10 19Total new orders 20 21 -1 22 20 12 1 19 16 30Employment 22 12 5 21 19 16 1 19 14 16Average price of domestic orders 14 9 10 15 6 -1 1 10 1 -2Average price of export orders 15 6 10 8 2 -2 2 7 2 -2Margins on domestic orders -7 -12 -11 -4 -10 -15 -13 -1 -7 -5Margins on export orders -1 -13 -5 -6 -10 -18 -11 -2 -5 -5Levels of cashflow -3 1 -14 -1 0 -6 -11 8 -3 17







Recovery on the cards for the manufacturing sectorManufacturing output growth exceeded expectations in the second quarter of this year, expanding 0.7%. We are now expecting a contraction of 0.5% in 2013, up from our August forecast of -0.7%, much of which is due to previous falls in output. The recent run of very positive data supports our view that the manufacturing sector will continue growing on a quarterly basis for the rest of this year and into 2014. Of particular importance to manufacturing are the recent rises in consumer confidence, consumption, and export growth to non-EU markets.

We are forecasting manufacturing sector output to expand 2.1% in 2014, slightly ahead of growth in the wider economy. This return to growth is expected to be relatively broad-based, with output in 11 out of 13 manufacturing sectors forecast to grow next year. After growing in 2012 for the first time since the late 1990s, overall employment in manufacturing is expected to return to the long-run trend and fall moderately in 2013 and 2014. However, employment is forecast to rise in five sectors in each of the next two years.

Chart 17

Modest decline in employment expected in 2013 and 2014Numbers employed in manufacturing (workforce jobs measure), 000s

2400

2600

2800

3000

3200

3400

3600

3800000s

20022003

20042005

20062007

20082009

20102011

20122013

2014

Source: EEF and Oxford Economics

Motor vehicles and other transport remain the strongest manufacturing sectorsMotor vehicles had a strong first quarter this year, and as such we have revised our forecasts for the sector up to 6.2% in 2013. Commercial vehicles output may

fall in June and July following a major plant closure but growth in cars and engines should offset this. The sector is seeing strong export demand for both cars and commercial vehicles, particularly from emerging markets, and strong domestic demand for new cars. Employment prospects are positive, linked to both continued growth and new product launches expected in the next couple of years.

Other transport remains one of the strongest manufacturing sectors, and growth is likely to continue on the back of strong order books. We are forecasting output growth of 8.8% this year. Modest employment growth in 2013 is forecast to be followed by stronger growth in 2014.

Improving consumer sentiment likely to provide a boost for some sectorsThe food and drink sector is well-placed to benefit from recent improvements in consumer sentiment. Although we are forecasting output to fall 2.1% in 2013 the sector should have a strong third quarter, driven in part by the warm weather. Stronger domestic demand should support the sector as we look ahead to 2014, and we expect modest growth of 0.2%.

Non-metallic minerals output is forecast to fall 5.8% in 2013, though this marks a considerable improvement on 2012, when output fell by 13.3%. Growth in employment and output looks likely in 2014, especially as the construction sector starts to benefit from growth in house-building, driven by improvements in consumer confidence and the government’s Help to Buy scheme.

Growth in motor vehicles and construction will benefit a range of sectorsWe have revised up our forecasts for basic metals after particularly strong output growth in the second quarter of the year. We now expect growth of 3.9% in 2013. Major manufacturers in the sector reported better results in the recent quarter, based on stabilising steel prices in Europe and investment in productivity. Restocking and growth in sectors such as automotive and construction, will also drive growth but the sector still suffers from long-term overcapacity so gains in output prices may be short-lived. Employment in the sector is forecast to fall 2013 and 2014 as the sector continues to focus on increasing competitiveness.

Sector forecasts




In contrast with basic metals, we have revised down our forecasts for the metal products sector, following a contraction in the first half of the year. However, the sector is well-placed to benefit from expected growth in the motor vehicles and construction sectors later this year and into 2014. Reports of companies upping investment and employment in order to meet new demand mean we expect some employment growth in 2013.

Rubber and plastics is also likely to benefit from strength in the automotive and construction sectors. Companies are benefiting from lower raw materials costs and recent work to improve productivity and cost control. A fall in output in the first quarter means the sector will likely contract in 2013, but we are forecasting a return to growth and an increase in employment in 2014.

As confidence starts to rise other sectors should pick upMechanical equipment saw a significant fall in output in the first half of 2013, which has led us to revise down our forecasts for 2013 to a contraction of 9.8%. However, the sector should benefit from the increase in investment intentions seen in this survey and we expect a return to growth in 2014. There do, however, remain risks to this forecast as intentions do not always translate into actual investment.

Electronics also saw output fall in the first half of 2013, and we expect output to fall 0.8% this year. The sector has contracted every year since 2000, but we have seen signs of the rate of contraction slowing and growth in some areas, such as components. This could lead to growth for UK electronics in 2014, which tends to do well when the global sector is nearing capacity. However, some of this growth will be led by productivity improvements, so it is unlikely that employment will rise.

New and niche products are also providing opportunities for manufacturersThe electrical equipment sector is likely to see a modest contraction of 1.3% this year, after a weak end to 2012, but prospects remain strong for 2014 with new products coming to market. Linked to this, a number of announcements of vacancies mean employment may start to grow.

There is a similar story in the textiles sector, which has also seen recent contractions in output – and indeed we expect output and employment to fall this year. However, there are opportunities for manufacturers who are developing new products in niche areas such as surgical textiles.

Sector growth rates and forecasts% change

Output Employment2012 2013 2014 2012 2013 2014

Basic Metals -4.0 3.9 2.1 0.7 -3.2 -3.1Metal products 3.1 -2.8 2.6 8.4 3.5 1.0Mechanical 0.9 -9.8 4.3 5.5 -1.6 0.1Electronics -0.4 -0.8 2.6 -10.9 -3.5 -0.9Electrical 11.1 -1.3 4.6 3.1 3.1 0.4Motor vehicles 3.9 6.2 2.9 5.8 5.8 2.4Other transport 8.1 8.8 6.1 7.5 0.9 6.1Food and drink -2.5 -2.1 0.2 4.1 -1.2 -2.8Chemicals -6.5 -0.9 1.3 4.7 -0.1 -2.2Rubber & plastics 1.6 -3.2 3.0 5.3 -1.8 3.5Non metallic minerals -13.3 -5.8 3.0 -0.3 2.0 4.6Paper and printing -6.0 3.6 -0.6 -6.5 -2.1 -0.4Textiles -3.2 -3.5 -1.4 4.8 -4.8 -7.2Manufacturing -1.7 -0.5 2.1 2.8 -0.7 -0.7

Source: EEF and Oxford Economics





EEF is dedicated to the future of manufacturing. Everything we do is designed to help manufacturing businesses evolve, innovate and compete in a fast-changing world. With our unique combination of business services, government representation and industry intelligence, no other organisation is better placed to provide the skills, knowledge and networks they need to thrive.

We work with the UK’s manufacturers from the largest to the smallest, to help them work better, compete harder and innovate faster. Because we understand manufacturers so well, policy makers trust our advice and welcome our involvement in their deliberations. We work with them to create policies that are in the

best interests of manufacturing, that encourage a high growth industry and boost its ability to make a positive contribution to the UK’s real economy.

Our policy work delivers real business value for our members, giving us a unique insight into the way changing legislation will affect their business. This insight, complemented by intelligence gathered through our ongoing member research and networking programmes, informs our broad portfolio of services; services that unlock business potential by creating highly productive workplaces in which innovation, creativity and competitiveness can thrive.

BDO LLP is the UK member firm of BDO International, the world’s fifth largest accountancy network, with more than 1,200 offices in 138 countries. We operate from 24 offices in the UK, with some 3,500 partners and staff. We believe that clients want an adviser they can trust, one who understands them and their objectives. Our sector-focused approach means we provide genuine expertise in what matters to our clients – so our advice is always relevant, always insightful and frequently challenging.

Like us, most manufacturing clients are now active internationally. Most are involved in acquisitions, public

offerings and major capital projects. We have great experience in those areas. Our manufacturing clients have regulatory, reporting and legislative issues. We bring sector expertise and a proactive approach to assist. Our clients want to mitigate and manage tax liabilities globally. Our international specialist team have the skills to assist. Manufacturing remains one of the key industries of the UK economy. We are delighted to be able to play an active role in supporting the businesses that operate in this vibrant, changing and challenging sector.

About us

About BDO LLP

To find out more about this report, contact:

Lee Hopley Chief Economist020 7654 1537 [email protected]

Rachel Pettigrew Senior Economist020 7654 [email protected]

Felicity BurchEconomist020 7654 1542 [email protected]

EEF Information Line0845 250 [email protected] The business trends data used in this survey has been provided by members of EEF and Scottish Engineering.

To participate please contact [email protected]

Published by EEF, Broadway House, Tothill Street, London SW1H 9NQ

Copyright ©EEF September 2013

To talk about any issues your manufacturing business may be facing please contact:

Tom Lawton Head of Manufacturing 0121 352 6200 07778 343 [email protected]



We foster enterprise and evolution to keep your business competitive, dynamic and future focused

www.eef.org.uk

Documents

MANUFACTURING OUTLOOK€¦ · Manufacturing Outlook September 2013 1 ob o: 15732 Proof Event: 7 Black Line Level: 0 Park Communications Ltd Alpine Way London E6 6LA Customer: EEF