Manufacturing shines in economic darkness

According to a major survey published today (2 June) by business and financial advisory firm Grant Thornton and the manufacturers’ organisation EEF, manufacturers are succeeding in swimming against the economic tide. Despite reports of weakening economic growth in the UK, firms reported a rise in domestic orders. Export orders have also remained relatively strong although there are indications of a softening, possibly due to weakening conditions in the United States. The survey did however add to the Bank of England’s concerns about inflation, with firms having increased prices and more expecting to do so. In contrast, manufacturers taking part in the survey suggested they have not been able to pass on all of the cost rises they’ve suffered and that profit margins have been squeezed. In addition, higher inflation is not currently feeding into higher wage settlements, with companies bearing down on wage costs to offset increases elsewhere. Grant Thornton’s head of manufacturing Bob Hale (pictured) said most manufacturers were proving much more resilient to the credit crunch than many analysts had predicted. “The pain of raw material price inflation and tighter refinancing is balanced by the gain of a weaker pound for exporters and the growing demand for the quality output that UK manufacturers have gained a reputation for producing," he concluded. At EEF, chief economist, Steve Radley, said manufacturers were providing a “beacon of light amidst the current economic gloom” and remained cautiously optimistic about their immediate prospects. “Companies are responding to the squeeze on their margins from rising costs by continuing to invest in their businesses to drive up productivity. However, at a time of heightened uncertainty, the government needs to send a clear message that it will ensure that the UK remains an attractive place to do business," Radley urged. Among its key findings, the survey showed robust activity in second quarter, increasing pressure on margins’ investment and employment intentions remaining firm, confidence about the next three months, and an upward revision of growth for 2008. All sectors reported strengthened output balances with the exception of motor vehicles and other transport, the two strongest sectors last quarter. All regions also reported healthy levels of activity, with the North East in particular seeing a large upward swing. Recruitment was strongest in mid size companies between 100 and 150 employees with over a third planning to increase jobs in the next quarter. However, the combination of higher raw material, energy, component and freight costs has clearly eaten into firms’ margins as they have struggled to pass on the all of the costs rises that they are facing. Despite this, there was a pick up in both domestic and export prices, showing companies hade been able to raise prices to some extent, particularly in the basic metals and metal products sectors. In spite of the pressure on margins, investment intensions remained firm in the last quarter. Plans to expand investment were widespread, with all sectors recording positive balances. Given the relatively upbeat survey results and the resilience shown by the sector in the first half of the year, EEF has revised up its forecasts for 2008. Manufacturing is forecast to grow by 0.9% and engineering by 1.3% this year, with a slight improvement in manufacturing next year to 1.0%. Engineering is expected to remain at 1.3% in 2009.