UK manufacturers have made strong gains in recent years, but several recent reports suggest a dip in confidence in the near future.
Britain’s manufacturers should be bracing themselves for a turbulent period, if recent economic reports and forecasts are to be believed.
Although the UK has officially emerged from the last recession and returned to reasonable levels of growth, the manufacturing sector has struggled to reach the output levels recorded prior to the financial crisis of 2008.
A report published this week by analyst Markit shows that the lower demand for investment goods seen over the past year has now been matched by a slowdown in consumer demand in recent weeks. Recent figures issued by the Office for National Statistics (ONS) show that manufacturing output fell by 0.8% in August 2015 when compared with the same month in 2014.
Previously, the manufacturers’ organisation EEF reported in September that a “rollercoaster of risks” were taking a toll on UK manufacturers. The quarterly EEF/DLA Piper Manufacturing Outlook survey found that the level of output and orders in the sector were both down on the previous three-month period, while domestic demand had fallen for the second consecutive quarter.
New export orders dipped to a six-year low, while export margins also declined. As a result, the EEF said it had been forced to downgrade its 2015 manufacturing growth forecast to 0.7% from its original level of 1.7%.
So what are the issues and risks that the British manufacturing sector is facing at the moment? These appear to be a mixture of long-standing and more recent factors.
Since the emergence of the eurozone debt crisis in 2012, the pound has strengthened considerably against the euro, making our EU exports significantly more expensive. But more recently, slowing demand in emerging markets such as China and the Far East as well as Latin America has created new problems for UK-based producers.
China’s prospects are the biggest concern: official forecasts of the country’s GDP growth were revised downwards over the summer, and this had a devastating impact on the Shanghai stock exchange as well as on share prices around the world.
Any slowdown in the world’s second largest economy is widely expected to drag down global demand. Already, the Bank of England’s chief economist Andy Haldane has warned that the resulting shocks to the banking system could lead to a new, third stage of the international financial crisis. This may in turn result in new restrictions on credit and a repeat in the fall of business investment witnessed in the aftermath of the credit crunch.
However, it is not all doom and gloom, the EEF said. The organisation’s survey found that the number of manufacturing firms looking to hire during the coming three months outweighed those who did not expect to appoint new staff. A narrow majority of businesses also say they plan to increase investment in the final quarter of 2015.
At present it is impossible to predict how events in China will play out, or how the eurozone debt crisis and Greek problems will be resolved – if at all.
However, as the EEF’s chief economist Lee Hopley says, it is worth noting that confidence has dipped rather than nose-dived. “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.”
Takeaways:
- A number of reports indicate that UK manufacturing has struggled over recent months.
- Worries over the eurozone and China has led to a loss of confidence.
- A majority of manufacturers however expect to increase staffing levels and investment over the rest of 2015.
- Despite uncertainty, firms should prepare to take advantage of any improvement in economic conditions.
Take a look at our latest infographic: Future sentiment - what sets manufacturers apart?
