What does 2018 hold for UK manufacturers?

Manufacturers positive about 2018 prospects

On every firm level indicator in our survey, more manufacturers are expecting growth than decline, and in every case responses are more upbeat than they were going into 2017.

Topping the rankings again this year is productivity gains in the next 12 months. Just over two-thirds of companies surveyed expect to make efficiency improvements to their UK operations this year, up from 56% last year. Our survey also flags up specific actions that will be underway to support this with more focus on process innovation and increased automation both prominent strategies for manufacturing Executives. As we pointed out last week, it's getting ever more critical that industry delivers this.

An indication that companies expect to be busy again in 2018 is the level of expectation on orders growth, with demand from UK and export customers forecast to be up on last year. Inevitably this will be driving the need for companies to bring more skills into their workforce.

Is this about the weak pound?

Ah yes – the most asked question when talking about manufacturing success stories. Regular readers will know the answer to this as we have blogged extensively on the impact of exchange rate movement on manufacturing.

In summary – the weak pound has a role in the upswing in demand from overseas, but the improving health of the global economy is a more important driver of the rest of the world buying British goods.

Our survey shows that UK manufacturers are the most upbeat about global economics conditions going into 2018 for three years.

What sectors are particularly benefiting?

Encouragingly, all manufacturing sectors seems to be ready for growth this year. In terms of the export outlook companies manufacturing investment goods are the most positive about their sales outlook. Expanding global manufacturing activity + technology advances = increased appetite to invest.

These sales expectations would appear to be well founded given the upbeat assessment of the business investment outlook in many parts of the world for the next couple of years.

Intermediate goods manufactures – for example companies in the supply chain making rubber and plastics components or chemicals, for example – are also expecting a positive sales outlook, particularly in the domestic market. And despite evidence that squeezed consumers are pulling back in the UK, manufacturers supplying directly to households are also reasonably optimistic about the demand outlook. This is likely to reflect the dominate food and drink sector and potentially some signs that consumers and retailers may have preference for UK producers over imports which may be more expensive due to the weaker pound.

What could possibly go wrong?

In short, quite a few things. As we’ve seen in the past three years, manufacturers have identified more risks that opportunities for their business in the coming 12 months. And the balance of companies agreeing with this has also been steadily on the increase.

Front of mind are things that could go wrong in burgeoning export markets. Further action in the US that looks likes protectionism or wobbles in big emerging economies such as China have the potential to knock this positive sentiment off course.

But there are other firm level risks and challenges that will need a plan of action from manufacturers – and some of these are connected with the strong pick-up in activity companies have been experiencing. Half of companies in our survey are worried about having insufficient capacity to meet demand and slightly more (54%) are worried about significant upward pressure on pay.

Also a notable risk is the threat from cyber-security breaches. This isn’t a concern confined to big corporates – more likely to have hit the headlines in recent times – firms right across the supply chain not only have it on their radar, but are putting in place actions to mitigate against potential breaches.

You haven’t mentioned Brexit

It almost goes without saying that manufacturers have a host of Brexit-induced risks on their radar and the top one – concerns about exchange rate volatility and associated impacts on input costs haven’t shifted much compared with last year’s risk rankings.

Additionally, we explored concerns around the relocation of a major customer from the UK (25% of manufacturers identified this as a Brexit-related business risk) and an increase in EU nationals leaving the business (34%).

Despite the dominance of these risks in our report this year, a couple of points stand out. The first is that a majority of companies continue to see the UK as a good place for their manufacturing operations in the year ahead – though not quite as many as agreed at the start of 2015.

Secondly, there are no indications – as yet – that manufacturers will be putting their investment elsewhere in response to Brexit or exchange rate movements. The majority of companies will be making the necessary investments to fulfil growing order volumes and for the small group with relocation plans it is just as likely that reshoring is being considered as offshoring.