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EEF lifts forecasts as manufacturing thrives ... or does it?
Published:  03 June, 2008

EEF, the manufacturers’ organisation, has raised its growth forecasts for the UK manufacturing sector for 2008, following a survey which shows that Britain’s manufacturers are continuing to defy the pervading economic gloom. According to the study, conducted by EEF with Grant Thornton, manufacturers achieved their tenth consecutive quarter of healthy growth in the second quarter of 2008.

But a much gloomier picture of the manufacturing sector comes from another survey, conducted by the Chartered Institute of Purchasing and Supply (CIPS) and NTC Economics, which reports that a three-year period of sustained expansion in UK production ended in May, following a decline in new orders. According to this report, inflationary pressures are still building in the sector, and output prices have increased in each of the past 34 months – the most sustained period of charge inflation in the history of the CIPS/NTC Purchasing Managers’ Index.

The bullish EEF study says that, despite weakening economic growth in the UK, manufacturers are reporting 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 US.

Given its upbeat survey results and the resilience shown by the sector in the first half of the year, EEF has revised its growth forecasts for 2008 upwards. It now forecasts that manufacturing will 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.

The survey did, however, add to concerns about inflation, with many firms having increased prices and more expecting to do so. But it also suggests that manufacturers have not been able to pass on all of their cost rises and that profit margins have been squeezed. The higher inflation is not currently feeding into higher wage settlements, with companies clamping down on wage costs to offset increases in other costs.

Stephen Radley

"Manufacturers are providing a beacon of light amidst the current economic gloom, and remain cautiously optimistic about their immediate prospects," comments the EEF’s chief economist, Steve Radley (above). "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."

According to the EEF, output and orders showed positive balances for the tenth consecutive quarter, at +16% and +13% respectively. After falling significantly last quarter, the balance on domestic orders picked up, rising from +2% to +4%, while that for export orders edged lower to +10%.

In contrast to a mixed picture in the EEF’s previous survey, all sectors reported strengthened output balances with the exception of motor vehicles and other transport, the two strongest sectors last quarter.Recruitment was strongest in mid-size companies (with 100-150 employees). Over a third of them are planning to add jobs in the next quarter.

However, the combination of higher raw material, energy, component and freight costs has eaten into firms’ margins as they have struggled to pass on the all of their cost rises. In spite of the pressure on margins, investment intentions remained firm in the last quarter, with companies reporting widespread plans to expand investment.

"These figures show most manufacturers have made hay while the sun was shining, and are proving much more resilient to the credit crunch than many analysts had predicted," says Bob Hale, head of manufacturing at Grant Thornton. "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."

The downbeat CIPS/NTC survey reports that new work received by UK manufacturers has fallen in each month so far this year, with the weak domestic market being the main drag on order books. It also says that after rising slightly in the previous two months, employment in the UK manufacturing sector fell during May.

"Following a further decline in new work for UK manufacturing firms, May marked the end of a three-year period of sustained growth for the sector and entry into a period of ‘stagflation’ – no growth and high inflation," comments Roy Ayliffe, director of professional practice at CIPS. "The weak domestic market proved the Achilles Heel of manufacturers, while modest gains in new work from Europe and China were reported. Furthermore, any hopes raised by increases in employment in March and April were dashed in May as jobs were cut."

"The UK manufacturing sector has experienced a turbulent start to 2008," adds NTC economist, Rob Dobson. "A mix of weaker demand and intense cost-inflationary pressure ended a sustained period of expansion in the sector during May, while the rate of increase in factory gate prices broke a further series record high. It is becoming increasingly likely that charge inflation will add further pressure to consumer price inflation in the coming months, making the MPC’s tightrope walk between rising cost pressures and slower economic growth even more precarious."

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