Survey Shows Manufacturers Feeling Economic Chill

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Government urged to boost economy as survey shows manufacturers feeling economic chillDespite posting a twelfth consecutive quarter of growth, Britain’s manufacturers are feeling the chill from a slowing economy, according to a major survey published today (1 September 2008) by EEF, the manufacturers’ organisation and Grant Thornton.

Even with output holding up over the last few months, EEF’s survey shows that a stagnant UK economy and a sharply deteriorating eurozone are now impacting on all sectors of manufacturing. However, the survey also shows the continued dilemma facing the Bank of England as companies’ price expectations continue to rise.

EEF believes it therefore falls to the government to address the rising risks of further economic weakness. By bringing forward policies that buttress business from gathering economic headwinds, EEF believes government can minimise cuts to jobs and investment and pave the way for an eventual upturn.

Commenting, EEF Chief Economist, Steve Radley, said:

“Manufacturing has shown considerable resilience in the face of a credit crunch, a global economic slowdown and a massive increase in its costs. But there are now clear signs that these pressures are starting to take their toll on companies

“Given the Bank of England’s hands remain tied in the short term, it is now essential the government tackles this turning point for the economy head on. It must avoid adding any further costs to business and put in place policies which will provide the building blocks for an upturn.”

Key findings:
·    Output holds up in last three months
·    New orders at 3 year low
·    Domestic orders plummet but exports remain firm
·    Price expectations rise
·    Profit margins deteriorate
·    Employment and investment intentions go into reverse
·    Sharp decline in expectations

Output held up in the last three months for the twelfth consecutive quarter, eleven of which have been in double digit territory, highlighting the strength of manufacturing in recent years. However, the balance on orders fell eleven points to its lowest level for 3 years. This was largely due to fall in domestic orders (down to -13%) as export orders rose from +10% to +18%, fuelled by a weaker pound.

While the output balances remained positive across most sectors, five of the seven sectors surveyed reported weaker activity compared with the previous quarter.  Basic metals and electrical equipment saw the sharpest falls, relative to last quarter whilst electronics and other transport equipment were the only two sectors to show an improvement in trading conditions, reporting strong balances of +46% and +43% respectively.

As might be expected, the slowdown is now beginning to impact on employment and investment intentions.  The balance on investment was negative (-1%) for the first time in ten quarters, whilst all regions reported weaker employment balances. Looking forward the picture is for greater levels of job cuts with only London and the South East and Eastern regions planning to increase staffing levels.

More firms were able to raise both domestic and export prices in the past three months, as the balances picked up to +27% and +18%, respectively. However, the survey shows that this has not translated into an improvement in profit margins where the balances on both domestic and export margins remained negative.

Looking forward, despite output holding up in the past three months the survey shows falling confidence levels amongst manufacturers. Both output and orders balances entered negative territory for the first time since the end of 2002 and expectations for both domestic and export orders have weakened.

Paul Bowater, Bristol-based Director within Grant Thornton’s Manufacturing Group, commented:

“Manufacturing in Bristol and the West remains markedly optimistic in comparison to the rest of the UK, with the most positive sentiment in output expectations, and an upbeat view on export sales, margins on exports and cashflow.

“The majority of manufacturers will now be part of the chorus calling for new Government initiatives to support the sector, as any respite will now be welcome in what is likely to be a winter of economic discontent.”

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