South: Manufacturing’s slide may be bottoming out, find EEF survey

This year’s first quarterly EEF Manufacturing Outlook survey shows signs that the sector’s negative slide may be coming to an end. Improvements are reported in output and orders, and there are expectations of a further pick-up over the coming quarter. But with risks still running high, and regional variances in performance, EEF cautions that the sector is not yet out of the woods.

All things being equal, manufacturing should see a return to modest growth this year, but the timing of an export-and-investment recovery looks less certain. On this basis, EEF is revising its GDP forecast down from 2.1% to 1.9%. It is also shaving its manufacturing-growth forecast down to 0.6% from 0.8%. 

In the South East, manufacturers are still bucking the trend with a net 21% of firms reporting a rise in output. This rise looks set to continue, with a net 7% saying that output will increase in the second quarter of the year. The story is also good when it comes to orders. A net 18% of firms report an increase this quarter, while 11% predict this will continue as they steam into the second quarter. 

Manufacturers’ employment intentions in the region remain a bright spot. This quarter a net 18% of firms are on the recruitment trail. Looking ahead to the next three months, however, only a net 4% expect to be hiring. Similarly, investment intentions remain positive, but actual investment has weakened. Only a net 4% of firms in the South East expect to invest over the coming year.

The region’s manufacturers, after ending 2015 on a high compared to their peers across the UK, report a small uptick in confidence about the economy. Confidence in their own business prospects has, however, very slightly inched down, leaving them in the middle of the pack compared to their UK peers.    

Across the UK, the story is one of manufacturers finding their feet again after last year’s slide. The findings indicate that demand from the domestic market and abroad is not as weak as before. Further stabilisation is expected during the second quarter, particularly in export orders. 

But challenges remain. While companies seem to be finding some growth hotspots around the world – aided by the recent fall in sterling – there is no sign as yet in the short-term of a sustained improvement in the demand environment which would swing export orders back into positive territory.

Global uncertainty still impacts on exports, and this means manufacturers lack the confidence to invest and boost headcount. The difficult outlook presents a particular challenge for companies considering bigger or longer-term investment plans. The UK’s EU referendum campaign is likely to add to the sense of caution.

Sectoral variations continue to be the norm with a two-speed performance clearly evident. The drag from the exceptional difficulties facing the steel sector continues, while sectors exposed to the slump in the oil price continue to be the hardest hit, with chances of a sustained recovery in 2016 looking slim.

Jim Davison, South East region director at EEF, said: “After the gloomy end to 2015, these latest data show a chink of light. But, we should not be getting the deckchairs out yet.

“What these findings make clear is that manufacturers face challenge enough – they certainly don’t need more pressure from domestically generated uncertainty or costs. Already almost four in ten identify rising business costs as a key risk this year, while the proportion of companies viewing the UK as a competitive place to do business has fallen from 70% in 2015 to 56% this year. We’re urging the chancellor to take this message on board and signal support for the sector by avoiding creeping cost-and-policy changes at the next Budget.”