South East: Region bucks trend as manufacturing’s growth prospects decline, says EEF

South East manufacturers are ending the year on a high, despite gathering gloom from the global economy, according to the latest Manufacturing Outlook survey from EEF, the manufacturers’ organisation, and global law firm DLA Piper.

The Q4 survey shows further deterioration in most of UK manufacturing’s key indicators confirming that, after a big step forward in growth in 2014, industry has taken a step back this year. The gloomy outlook has prompted the first negative forecast for employment and investment in almost six years – a trend from which manufacturers in the South East so far appear to be immune.

Output and orders in the region have remained strong during Q4 with the trend looking set to continue as firms head into 2016. There is only the merest weakening in orders over the next quarter to indicate that the region’s manufacturers are sailing through more troubled waters.

The signs are however more telling when it comes to employment intentions. In Q3, a net 50% of firms expected to be on the recruitment trail this quarter. The reality is that just 6% have seen an increase in employment, while a net 6% forecast jobs growth in Q1 2016. However, at least firms are still in positive territory, unlike their peers in many other parts of the UK.

There is also positive news on the investment front, where a net 20% of firms in the South East expect to see investment increase over the next year.

Interestingly though, despite putting in such a strong performance, South East manufacturers are not the most optimistic in the UK about the economy. They also come second behind those in the East Midlands for feeling confident about their own business performance in the year ahead.

Across the UK, manufacturing’s concerns about world trade growth and weakening demand from both developed and emerging markets have become more pronounced. The domestic market is also looking considerably less supportive than in recent years, although some bright spots remain, in particular motor vehicles, aerospace and chemicals.

Nationally, output and orders balances fell sharply in the last quarter – the sharpest quarterly decline since Q3 2014 when the collapse in the oil price first started to impact.

The lack of growth prospects in export markets is especially marked and, after a brief improvement, manufacturers’ confidence in Europe has started to wane again.

Investment and recruitment intentions have both turned negative for the first time since Q1 2010. Employment in particular has been affected by the build-up of spare capacity in sectors supplying oil and gas, while job losses in the steel industry have impacted on prospects for the metals sector.

As a result of the weakening position, EEF has revised down its growth forecasts for this year and next. Manufacturing is forecast to contract by 0.1% this year and recover slightly to grow by 0.8% in 2016. EEF is forecasting GDP growth of 2.4% in 2015 and 2.1% in 2016.

Jim Davison, South East region director for EEF, said: “The prospect of manufacturing growth this year has all but faded away with another disappointing set of indicators from our survey. The downbeat mood may not be universal across all industry sectors, but in the face of mounting challenges it seems to be spreading. Companies in this region appear to be riding the storm, but this data shows they are not entirely immune.

“The impact on manufacturers’ employment and investment plans suggests that these clouds will be hanging over us as we go into next year. While the chancellor’s recent Spending Review will have been seen as supportive to industry, it is critical that government continues to act to ensure that the UK is a competitive location for manufacturing.”

Richard May, partner and head of the manufacturing sector at DLA Piper, said: “As the year draws to a close the results of the survey show that it has undoubtedly been a very challenging one for manufacturers. The contraction of the sector in 2015 appears to have been a real blow to confidence and the outlook for next year is also rather gloomy.  While it is disheartening, it's not all bad news with the consumer facing sectors performing well in the UK and abroad. Let's hope that 2016 turns out to be a more stable year globally and the manufacturing sector gets a chance to recover."