South East: Manufacturing recovery not yet secure but region's firms buck the trend, says EEF/BDO survey

Britain’s manufacturers are seeing a mixed picture which will delay the prospect of a return to stronger growth until the end of the year according to a survey published this week by EEF, the manufacturer’s organisation, and business advisers BDO LLP.

However, the South East has bucked the trend with output increasing by a balance of +23%, helped by the performance of the electronics and food and drink sectors which continue to be among the best-performing manufacturing sectors. Prospects for the next three months are also positive with a balance of +27%. Companies in the South East are also intending to hire more workers with a balance of 24%.

Across the UK, while activity levels remain largely unchanged from the second quarter, manufacturers’ confidence about future prospects for the overall UK economy have taken a knock, leading EEF to downgrade its growth forecasts for both the economy and manufacturing for this year and 2017.

In contrast, however, the export picture looks more positive off the back of the fall in sterling and stronger demand from the EU, US and emerging markets. In fact, export orders have exceeded expectations by moving into positive territory during Q3 to +2% - the highest balance since 2014 Q2.

As a result of the depreciation in sterling, manufacturers are far more positive about future export orders. A balance of +12% are expecting a boost in the next quarter with the biggest driver appearing to be demand from the EU. However, the flipside of sterling’s depreciation has been increased pressure on profits this quarter with price increases planned for the next three months.

Looking ahead, expectations across the sector are that output and orders balances will finally move into positive territory by the end of the year. This is supporting plans for recruitment across some sectors in the next three months, but is not yet sufficient to prompt a turnaround in investment plans.

Jim Davison, South East and London region director at EEF, said: “Manufacturers’ confidence collapsed in the aftermath of the referendum, but our latest survey provides some relief that this has corrected. Signs of an export revival are helping to drive more optimism about activity in the second half of the year, but concerns about whether the UK economy can shrug off post-referendum challenges are still clearly evident.

“These risks are expected to hit some sectors, such as industries linked to investment goods and construction, harder than others. Despite the short-term outlook for manufacturing remaining broadly stable, the continued downward slide in investment plans should keep policy makers alive to the potential risks facing the sector.

“The Government needs to proceed quickly in developing an ambitious industrial strategy to make the UK an attractive proposition for future manufacturing investment. This will become even more critical once negotiations to leave the EU begin and Article 50 is triggered.” 

Arbinder Chatwal, director and head of manufacturing at BDO LLP in Southampton, said: “While the outlook for the UK economy remains uncertain, manufacturers are more confident about their own business performance and it’s promising to see manufacturers in the South East have experienced increases in output over the last quarter. This shows they believe there is a positive way forward from here and that Brexit might not have been the portent of recession.  

“Some sectors are clearly facing longer-term structural challenges where global factors are at play and these are unlikely to abate anytime soon. However, history shows that in difficult economic circumstances there are always sectors and companies that thrive on being driven to innovate, develop new products and search out new markets and customers. These are the factors that successful companies will be focusing on to continue this improvement in business performance.”

EEF and BDO’s Q3 Manufacturing Outlook can be downloaded here.