UK manufacturing production levels disappoint and optimism is falling

Production levels among UK manufacturers were flat in the three months to June, disappointing expectations of strong growth, according to the latest industrial trends survey from the CBI.

Some 14 per cent of firms surveyed reported that total order books were above normal and 32 per cent below normal, giving a balance of minus 18 per cent (similar to the long-term average of minus 17 per cent and last month’s figure of minus 20 per cent).

The balance for export order books (minus 22 per cent) was the lowest since January 2013, with 11 per cent reporting export orders above normal and 33 per cent below. Small and medium sized businesses struggled most in this area, with export orders at a balance of minus 29 per cent, while the motor vehicles, aerospace and transport equipment sector was strongest at plus 6 per cent – the highest since September 2012.

Volume of output was broadly flat over the last three months with a balance of plus two per cent. And while firms believe output will increase over the next three months (plus ten per cent), optimism is falling. Forecasts have moderated from a 22 per cent increase forecast in March and a plus 18 per cent prediction in May.

Howard Archer, chief UK and EU economist at IHS Global Insight, however, is positive about the future.

It does look like the manufacturing sector returned to growth in the second quarter after contracting 1.5 per cent over 2012 and by 0.3 per cent during the first quarter of 2013. While latest hard data show that manufacturing output dipped 0.2 per cent month-on-month in April, this followed gains of 1.1 per cent month-on-month in March and 0.7 per cent month-on-month in February. Consequently, manufacturing output was up by 0.5 per cent on a three-month/three-month basis while the year-on-year drop in manufacturing output narrowed to a 15-month low of 0.5 per cent in April itself.

Moving forward, manufacturers will be hoping that the recent signs of improvement in the UK economy are sustained and that this increasingly lifts business and consumer confidence which in turn translates into higher demand for capital goods and consumer goods. Manufacturers have been handicapped in recent times by businesses’ limited investment plans and by consumers’ reluctance/inability to make major purchases due to limited purchasing power.

Meanwhile, sterling’s overall softer tone in 2013 is largely good news for UK manufacturers as it should be increasingly feeding through to boost their competitiveness, and the benefit of this will be magnified if global growth can gradually pick up over the coming months. Subdued and stuttering global economic growth, and Eurozone economic weakness in particular, has been a constraint to foreign demand for UK manufactured goods. It is encouraging though that the May purchasing managers’ survey indicated that there had been a pick-up in orders from North America, East Asia, Russia, Germany and France.