UK manufacturing businesses are relatively positive about their near-term prospects, as output improves and more orders come in. The benefits to exporters from a low sterling comes with a sting in its tail however, as domestic demand falters to higher inflation, and input costs rise.
According to a report from BDO in collaboration with The Manufacturers’ Organisation, overall business confidence in the manufacturing sector has, Despite the Brexit vote, risen in the past quarter. .
Businesses in particular are more confident about their own outlook for the coming 12 months, with the average at around a 6.5, higher than the previous quarters. The West Midlands, South West and South East & London are the most positive about the situation, while the North West and Wales are slightly less upbeat.
Expectations around the future of the UK economy over the coming 12 months remain relatively neutral, at around 5.4 on a 10-point scale. The North East and East Midlands report the most confidence, while the South West and York & Humber are the most downbeat, at close to 5 each.
One area that has seen significant improvement since three months previous is output balance, increasing from -6.5% in Q2 2016 to 13% in Q3 2016. The authors note improvements were spread across most major sectors, with metal products one of the ‘star performers’, up 23% on the previous period, boosted by improved competitiveness from a lower pound. Electronics and electrical equipment output has enjoyed rosy growth, and are projected to see continued improvement moving forward, boosted by improving demand and capital investment.
The report too notes that orders have seen a considerable recovery coming into Q4 2016, on the back of strong internal demand. The balance of change stood at more than 15%, even while export orders dropped slightly. The improvement in internal orders stems primarily from a turnaround in two of the hardest-hit manufacturing sectors over the past two years, basic metals and mechanical equipment. The former, due to its high commoditisation, benefited from the depreciation of the pound, among others, while the motor vehicles sector too has seen improvements in orders, which has had a positive knock on effect to demand in its wider supply chain.
The coming three months, the researchers model, will be less positive for UK orders, as consumer spending begins to be affected by increased inflationary pressures from increased import costs. Export orders however, are projected to pick up to levels last seen in 2013, on the back of the lower exchange rate improving UK produced products’ competitiveness and improving global demand as the world economy picks up slightly.
The report further notes that Europe remains the region of highest demand improvement in the most recent quarter, followed by the Americas. Demand from Asia has remained stable, while demand from the Middle East has fallen. Fewer companies than the previous three quarters reported no demand increase.
While the drop in the pound has begun to boost demand for UK created products, inflationary pressures and import costs are projected to remain difficulties for UK manufacturers over the coming year. Inflation is set to hit 2.7%, the authors note, which is likely to impact already price sensitive consumers whose real wages are likely to stagnate – affecting savings rates as well as domestic spending.
Brexit uncertainty is also likely to affected investment, although, the report remarks, the Government’s commitment to supporting R&D will, partially, offset declines and create a more competitive offering from UK creators. Output across the manufacturing sector is forecasted to be broadly flat 2017 – the opposing forces of improved export competitively undone by inflationary pressures affecting input costs.