By Daniel Hunter

Britain’s manufacturers have endured a tough start to the year with conditions remaining around a three year low according to the first quarter manufacturing outlook survey published today (Thursday) by EEF, the manufacturers’ organisation and business advisers BDO.

Demand conditions remained difficult across a number of market, but Europe again stands out as being especially challenging. However, the survey also shows there are signs that manufacturers’ could see conditions turn around in the coming quarter with output and orders balances expected to recover back to levels seen in the early part of last year in the next quarter.

In particular there is a notable improvement in the proportion of companies planning for growth in overseas sales in the next three months and, importantly, this trend is fairly widespread across most manufacturing sectors.

The survey also shows with a forecast improvement in trading conditions in the months ahead, manufacturers are planning to increase their capital investment and employment levels.

“As expected, manufacturers have seen a tough start to the year as weaker conditions at home and abroad dragged on from the end of last year," Ms Lee Hopley, EEF Chief Economist, said.

"However, the outlook may be somewhat brighter looking forward and with more companies expecting to see growing production and sales in the next three months. This confidence is still fragile; world events have been moving quickly and at the moment it doesn’t take much for customers to hold back on placing orders.

“Nevertheless, the UK economy needs positive news, particularly as growth driven by more trade and investment has still to materialise on a more sustained basis. But a recovery with a bit more momentum behind it cannot be taken for granted. Government cannot afford to let up in efforts to take a more dynamic approach to boosting growth through investment, starting with the Budget in a few weeks time.”

Tom Lawton, Head of Manufacturing at BDO LLP, said: “These figures round off a gloomy six month run for the sector, however, the storm clouds do seem to be parting slightly. Sentiment is improved for the next three months which is translating into increased employment and ongoing plans for investment.

"Much of this is being driven by positive export expectations despite the fact that the landscape in Europe remains uncertain. What is needed is positive action, either from Government or increased lending from the banks, that provides the impetus to move positive intentions into actual output and sales.”

According to the survey a balance of 1% of companies reported declining output over the past three months, down slightly from the zero balance in the previous quarter. Manufacturers also struggled to secure growth in new orders over the quarter, both at home and in overseas markets, with a balance of 3% of companies seeing a fall in total orders over the past three months.

In addition to the negative output balances over the past three months, both domestic and export balances remained in negative territory. In particular, export orders, which during the period following the 2008/09 recession have consistently been stronger than domestic orders, have now been negative for two consecutive quarters reflecting the continued drag of weak eurozone demand.

However, the survey continues to show some marked differences between different manufacturing sectors. Basic metals suffered another difficult quarter with output and orders falling for a balance of 45% and 39% of companies respectively. And following what has been a very strong recovery, motor vehicles also posted negative balances across most indictors over the past three months. In contrast, upbeat responses from other transport, electrical equipment and electronics continued.

Looking ahead to the next quarter, there is a shift in sentiment, with a large improvement in both output and orders balances. At 22% and 19% respectively, responses are the strongest since the first half of 2012 and increased confidence is evident across most sectors. Orders expectations for the next three months are positive across all sectors, and with the exception of zero balances in motor vehicles and basic metals, all sectors are posting positive, forward-looking output balances.

The survey also shows positive news on recruitment where balances edged back up into positive territory this recent quarter. Investment intentions also remained positive for the eleventh consecutive quarter although the balances were weakest for firms with less than 100 employees, reflecting the barriers they face in particular on issues such as access to finance.

EEF’s forecasts for growth in manufacturing this year have been revised down again in large part as a consequence of the larger than expected contraction in output at the end of 2012. Growth of 0.3% is expected in 2013, with quarter-on-quarter expansion strengthening in the latter part of the year. The forecast for GDP is slightly weaker than the previous quarter at 0.9%.

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