Comment: UK manufacturing may be down, but we’re not out
By Felicity Burch
Data released by ONS last week showed that manufacturing grew in February despite difficult demand conditions in export markets. Industrial production figures were also up, which probably takes the UK away from the knife-edge of a triple dip.
Manufacturing grew by 0.8% in February, but this was on the back of a fall in output of 1.9% in January, which was worse than previously thought. Manufacturing would now have to grow 1.6% in March to avoid a contraction in output in the first quarter. This level of growth would not be unprecedented, as monthly figures are highly volatile, and there was growth of 1.6% as recently as December.
Looking back over the past few months the picture has been relatively weak, but this was to be expected. In March we published our Business Trends survey which showed that manufacturers experienced a difficult first quarter: a balance of one per cent of companies said that they saw output fall in the first three months of the year, which was the weakest balance we have seen since 2009.
Given the malaise in a number of key markets – as indicated by continuous weakness in a series of indicators, especially the eurozone purchasing managers' indices (PMIs) – it is perhaps unsurprising that our survey showed falling demand from overseas.
A balance of seven per cent of companies said export orders were down in the first quarter, following on from weakness at the end of 2012. This was borne out in today’s trade statistics, as exports fell 1.1% between January 2013 and February 2013. However, what was perhaps surprising was the relative strength of goods exports to EU markets, which grew 0.6% in February, compared with goods exports to non-EU countries which fell 4.7% in February.
This fall in exports to non-EU countries was largely driven by a fall in exports to the US, most likely affected by the US government’s budget sequester. Looking over the less volatile three-month period, goods exports to non-EU countries have actually increased 2.6%.
Indeed, despite difficult economic conditions, manufacturers have increased sales to non-EU markets in the past couple of years; in the third quarter of 2012, goods exports to non-EU countries hit a record high. And looking ahead to the next three months our Business Trends survey shows that companies expect export orders to improve.
Manufacturers continue to see non-EU markets as sources of growth. In our 2013 Executive Survey, half of manufacturers said they expected export sales to end the year higher than in 2012, and of those seven per cent said that they expected export sale to increase significantly. Manufacturers cited significant opportunities in Asia, South America and Africa, the latter two coming from a low base.
Nonetheless, Europe does still account for around half of the UK’s exports, and the ongoing drag on orders from the eurozone will therefore continue to impact on growth prospects in the coming months.
It is not only geographical markets where demand patterns are varied. There is also significant divergence between sectors. For example, while manufacturing as a whole contracted 1.8% in the year to February 2013, the electrical equipment sector grew by 9.1%. This sector includes things like power generation equipment and has benefited from the strength in oil and gas. Looking ahead to the next three months, a strongly positive balance of 37% of companies in this sector said they thought output would increase in our Business Trends survey.
Similarly, other transport equipment, which grew 9.4% in the same period, is also likely to do well. The sector, which comprises mainly defence and civil aviation, is characterised by long-term orders. Large order backlogs on the civil side should support output for the next few years. Although some companies in defence will be suffering from cutbacks in government budgets around the world, the UK and the US will particularly be affected. Our Business Trends survey showed that a balance of 33% of companies expect growth in the second quarter.
So, while the weakness in Europe seems unlikely to abate any time soon, markets outside of the EU are faring better, and some sectors continue to buck the trends. It is still too soon to write off manufacturing’s contribution to a better balanced economy.
Felicity Burch is an economist at EEF, the manufacturers’ organisation. She regularly blogs on economics and manufacturing at www.eef.org.uk/blog.
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