manufacturing 63 Ready for recovery?
There is cause for optimism in the UK economy, with the recent half-year ‘Economic Prospects’ report by EEF, the manufacturers’ organisation, forecasting overall GDP growth of 1.1% this year (up from 0.9%), steadily increasing to 1.8% by 2014, writes Dave McCulloch, partner, Baker Tilly Manufacturing Group
The EEF’s forecast for the manufacturing sector is for a contraction of 0.7% this year (due to a poor end to last year), with output expected to pick up in the second half of this year leading to growth of 1.9% over the next 12 months.
There are, however, a number of challenges which many manufacturers face:
• Investment in new plant and machinery and skills was understandably reduced during the downturn. A continued lack of confidence in the economy is still impacting investment decisions and there is a risk that some manufacturers could be left behind as the recovery gathers pace.
• With a lack of orders over the last few years, financially stronger manufacturers instead focused on research and development, benefiting from the tax credits available from the Government. Those who did not, or could not, pursue this strategy, may find that their products are outdated or that their production methods are less efficient than their competitors.
• Manufacturing continues to suffer from not being an ‘aspirational’ career. Many companies have already forged links with schools and colleges to demonstrate the challenges and rewards that the sector can offer. Work experience placements can provide a good source of new talent and should not be restricted to the largest employers.
• Business failures during the downturn have been unexpectedly low. A number of reasons have been proposed to explain this, ranging from a reluctance among banks to be seen to as too eager to ‘pull the plug’ on businesses to which they lend, to property and asset values being too depressed to recover the lenders’ positions. Whatever the historical reasons, a recovery will put additional strain on manufacturers’ working capital, with potential increases in stock and work in progress, as well as trade debtors. Companies should ensure facilities are in place to cover their expected requirements, and maintain regular dialogue with their funders.
Manufacturing surges in the south as recovery takes hold
Manufacturers across the south are experiencing a surge in activity as the long-awaited recovery begins to take hold, according to a major survey released last month by EEF, the manufacturers’ organisation, and accountancy and business advisory firm BDO LLP.
According to the quarterly ’EEF/BDO Manufacturing Outlook’ survey*, a balance of 57% of companies in the south reported increased output, up from 18% in the past quarter and the highest level in 15 years since the survey began.
Order balances were also better than expected with 31% experiencing an increase; significantly higher than the 15% previously forecasted for Q3 2013.
Regional manufacturers appear confident that the positive trend will continue into Q4, with a balance of 38% and 40% forecasting output and orders to increase respectively in the run-up to Christmas.
The improved outlook is also translating into better job prospects, with a balance of 34% increasing headcount in Q3 compared to a forecast of 16%. A balance of 17% is expected to continue recruiting in the final quarter of the year.
This quarter the rebound is being led by a stronger domestic market which has often lagged behind exports. But conditions in overseas markets have also picked up with the balance of companies seeing growth in export sales rising to a two-year high in the past quarter. In line with recent official statistics the upswing in output is broad-based across all sectors.
Investment intentions have also increased across the region to 41%, compared to 13% (Q2) and -3% (Q1). UK-wide, there are signs that investment performance may finally begin to regain ground lost in the past three years with investment intentions, especially among SMEs, escalating sharply to some of the
THE BUSINESS MAGAZINE – THAMES VALLEY – OCTOBER 2013
highest levels seen in the survey’s history.
This is critically important if we are to see a rebalancing of the economy towards net trade and investment, and avoid relying on the consumer and the housing market to drive the economy forward.
Commenting, Jim Davison, EEF region director, said: “Industry’s prospects have brightened considerably in the past few months. There is growing confidence that improving trading conditions will continue into the final months of this year and then accelerate through the gears in 2014.“
Arbinder Chatwal, manufacturing specialist at BDO LLP in Southampton, said: “A domestic market at its strongest for almost three years, backed by export sales at a two-year high, means manufacturers across all sectors and throughout the supply chain are
• Increased risk of business failures in suppliers and customers should also be considered. Supply chain management has become increasingly topical, and credit checking of suppliers should form part of this process to ensure not only security of supply, but also to provide comfort where stage payments are required. Similarly, all customers should be credit checked, with clear procedures for any prospective customer who fails to meet the credit thresholds.
The UK has a strong manufacturing tradition, particularly in high-tech manufacturing. As the UK and subsequently the eurozone economies recover, the UK manufacturing sector needs to be positioned to capitalise on the increasing order levels.
Details: David McCulloch 0845-057-0700
david.mcculloch@
bakertilly.co.uk
feeling the benefits of an impressive return to confidence.
“The positive change in investment intentions is a powerful and important indicator, and key to the future growth and positioning of the sector in the regional, domestic and global markets.
“But let’s reiterate, this is not ’manufacturing sector – job done’ for the Government. We must use it as a strong foundation for continued efforts to ensure the sector gets the support it needs to act as an engine of change for our economy.“
The more positive economic data for manufacturing in recent weeks has caused EEF to upgrade its forecasts for the economy and manufacturing for 2013 and 2014. The economy is forecast to expand by 1.2% (1.1%) this year while manufacturing is expected to contract by 0.5% (0.7%). However, next year growth is expected to accelerate with the economy growing by 2% (1.8%) and manufacturing by 2.1% (1.9%).
* The survey was conducted between July 31 and August 21 with 290 companies responding.
www.businessmag.co.uk
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