A ‘rollercoaster of risks’ from the rest of the world has led to a deterioration in all of UK manufacturing’s key indicators and most notably in output and orders, where falling demand at home and abroad is taking its toll. The balance of manufacturers reporting output growth has dropped to its lowest level since Q4 2009 and, at -2%, contrasts sharply with manufacturers’ expectations.
Export orders in particular have suffered, edging down again to hit a six year low in response to continued problems in Europe over the summer and the slowdown in emerging markets. Looking ahead, however, over a third of companies report seeing signs of improving demand in Europe – the UK’s biggest export market. In contrast, the proportion of companies eyeing growth opportunities in Asia has fallen.
At the same time domestic demand, something of a beacon for UK manufacturing in the past couple of years, is not making up for falling overseas demand. And all of these factors have combined to bring forward looking indicators back to earth with a bump.
There are two important exceptions to this negative trend however. Manufacturers’ investment and recruitment intentions are both hanging onto positive ground with a net 6% of firms looking to hire during the next quarter and a balance of 2% looking to increase investment.
Once again, the survey shows some notable sectoral weaknesses, with electrical and mechanical equipment and non-metallic minerals acting as a drag on output over the past three months. These sectors also accounted for much of the weakness in domestic new orders. More positively, the transport and electronics sectors continued to push ahead with a balance of companies reporting growth in output and total orders.
Against this backdrop it is not surprising that confidence levels across manufacturing are starting to suffer. Looking ahead to 2016, optimism about the wider UK economy’s growth prospects remains fairly stable, but manufacturers are feeling less upbeat about their own growth prospects and this is reflected by the confidence indicator edging down a notch again.
Based on the findings, the current economic outlook and recent weaknesses in official data, EEF is halving its manufacturing growth forecast from 1.5% to 0.7% (down from 1.7% at the beginning of the year) and is adjusting its GDP forecast from 2.6% to 2.5%.
Lee Hopley (pictured), chief economist at EEF, says: “While UK data has continued to point to solid growth, UK manufacturing is having to contend with a rollercoaster of risks from the rest of the world and the white-knuckle ride is starting to take its toll.
“We’ve seen the future of the Eurozone on the line once again, turbulence and uncertainty over China and Greece and, of course, oil and gas are still a concern. Against this backdrop it’s no surprise that confidence is faltering and UK manufacturers are feeling less optimistic about their growth prospects for next year.
“However, it’s important to note that confidence has dipped rather than nose-dived and if the global drag lets up anytime soon then UK manufacturing should very swiftly get back into its previous stride. Industry and Government must continue to work closely together to help offset the risks and support investment and innovation in the sector.”
Richard May, head of the manufacturing sector at DLA Piper, says: “As we start to edge towards the end of the year the outlook for the UK manufacturing sector is somewhat bleaker than at the beginning of 2015. The impact of an increasingly globalised economy, and of course manufacturing sector, is taking its toll as a result of recent turmoil in Europe and Asia and as concerns about global growth are mounting.
“Having said that, UK manufacturers are not battening down the hatches yet as, whilst business confidence has dipped, it does remain positive looking ahead. We can remain hopeful that prospects for the sector will pick up again.”
