By Jonathan Davies

Growth in the UK's manufacturing sector has returned to more moderate levels after significant growth over the past 12 months, according to the latest quarterly survey published by EEF, the manufacturers’ organisation and business advisers and accountancy firm BDO.

The EEF/BDO Q3 Manufacturing Outlook survey reveals a continued positive picture with continued confidence being translated into on-going plans to invest in modern machinery and recruit skilled employees. In particular, investment intentions have now been positive for seventeen consecutive quarters.

However, EEF issued a warning that the demand picture is now more uncertain than for some time, with the Eurozone economy flagging significantly, political risks increasing and a stronger Sterling exchange rate. This more difficult picture overseas is reflected in export orders turning negative for the first time since the start of 2013.

EEF Chief Economist, Ms Lee Hopley said:

“Manufacturers are still on course for a strong year of output growth in 2014, but our survey points to a moderation in the pace of expansion from the take-off seen in activity over the past year. We’re also seeing manufacturers continue to recruit for skilled jobs and increase their plans to invest in the coming year — exactly what the UK economy still needs for balanced growth.

“However, there are clearly increasing downside risks overseas which could make sustaining strong growth and particularly stronger exports more challenging going forward. In the face of this, while UK politicians may be focused on next year’s election it is critical that efforts over the rest of this parliament remain focused on sustaining growth across manufacturing and the economy.”

Tom Lawton, Head of Manufacturing at BDO added:
“UK manufacturing cannot insulate itself from global market conditions and this is clearly shown in the dip in output. However, growth remains positive and long term investment and employment intentions feel much realistic at these levels.

“Although there is a mixed picture across manufacturers as a whole, both domestic and export demand for UK produced motor vehicles remains strong, due mainly to a continuing backlog. However, this cannot be relied on forever and it will be interesting to see which of the sub sectors emerges as the industry champion over the next six months or so. This will be decided to a large degree by the global market and how well UK manufacturers are able to cater to the mega-economies of the world.”

Output and order balances remained positive in the first quarter, with output and new orders both at +10%. However, output is down from +26% in Q2 while the figure for new orders compares with an average balance of +21% over the past year.

Looking forward, manufacturers are understandably more cautious than the buoyant expectations of previous surveys although they remain positive.

Forward-looking output balances have pared back to +22% from +34%, but still well above the series long-term average while there is similar confidence in the orders outlook with a balance of +20% (down from +32%) of companies planning for increased sales in the next three months.

The domestic market continues to be a source of strength although the balance of +3% was markedly weaker than the previous four surveys (+16% in Q2) and well below firms expectations. However, in the face of increased political instability, some impact from a stronger sterling and subdued global growth and world trade export orders turned negative for the first time since Q1 2013 at -4%, down from +9% in Q2 and +16% in Q1.

However, despite the somewhat disappointing outturn on exports in the past three months, companies are again pencilling in a stronger third quarter (+22%). However, given the mixed international outlook and, deteriorating situation in the Eurozone in particular, a strong recovery in exports this year is still uncertain.

The survey shows that most sectors reported an increase in output with motor vehicles and non-metallic minerals especially strong performers. Rubber and plastics manufacturers were the most upbeat with a balance of +80% of companies increasing output in the past three months. Electronics was the only sector to report falling output.

Despite an easing of demand both recruitment and investment intentions remain reasonably strong. A balance of +17% (+28% in Q2) of manufacturers plan to increase capital expenditure in the next year, the seventeenth consecutive quarter of positive intentions, although a renewed squeeze on cashflow in the past three months is a note of caution as to whether this trend will be sustained. This comes a week before EEF will publish its annual Investment Monitor.

Recruitment intentions also eased back to +18% (+23% In Q2) although this figure remains well above the long term series average. This pattern is broad-based across all sizes of manufacturing companies and sectors.

Looking ahead, while EEF expects continued expansion over the second half of this year and into 2015, the unexpectedly sharp slowdown in the pace of output growth in 2014q2 has led to a slight downgrading of the forecast for full-year growth to 3.3%, from 3.5% previously. 2015 will see a moderate deceleration in the annual rate of manufacturing growth to 2.1%.

Do you run a manufacturing business? Have you seen a slowdown in growth? You can email your reactions to editor@freshbusinessthinking.com

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