Capital equipment manufacturers lead the way
Capital equipment manufacturers have enjoyed something of a renaissance over the last year, as the strong global economy brings business investment back online. The mechanical equipment sector, as the chief investment good in UK manufacturing, is perhaps the sector that has benefited most from this turnaround, along with the supportive trade conditions given its high export intensity.
Meanwhile the electronics and electrical equipment sectors are also benefiting, the former having recorded five consecutive quarters of expansion for the first time since the dot com bubble. This is borne out in our 2018q1 survey, with capital good sectors leading the pack in terms of output and orders. We are forecasting healthy expansions in 2018, before a slowing next as Brexit uncertainty holds back some investment decisions.
This upturn in the global economy is also evident in the metal product sector’s performance, a key barometer of the industry given that it feeds into so many other supply chains. The sector, following a weak start to 2017, saw momentum build throughout the year, culminating in impressive growth of 5.8% in 2017q4. This momentum, combined with the strong global environment, should be enough to offset weakness in other parts of the economy - notably the construction sector - and we are forecasting healthy growth in 2018. As manufacturing slows however, we expect the metal products sector to follow suit and are predicting growth of 0.5% in 2019.
Basic metals, the key input into metal products sector also appeared to have turned a corner, recording growth of 3.1% in 2017. At the time of our sector forecasting meeting, the outlook for 2018 looked fairly positive. However the prospect of a Trump induced trade war (*sigh*) may have thrown these of course. We’ll be following developments closely and can’t rule out some revisions…
Sectors in construction supply chain to stutter
While the outlook for manufacturing is generally positive, the same cannot be said for construction. The industry actually had quite a strong 2017, expanding by 5.1%. However this performance was heavily weighted towards the start of the year, with 2017q4 representing the third successive quarter of contraction, indicating that momentum in the sector has been stalling. The sector is being hit by Brexit induced uncertainty. This of course was all before the liquidation of the UK’s second biggest contractor Carillion, and the knock on effects this is going to have across the supply chain. Non-metallic minerals, chemicals and rubber and plastics are all likely to be adversely effected, and we are forecasting a slowing across the board in 2018.
Mixed bag for consumer facing sectors
While the food and drink sector should have a couple of solid years, as the squeeze on consumers eases as inflation recedes and wages (finally) pick-up, the same cannot be said for textiles or motor vehicles. The textiles sector is suffering from long term issues, notably cheap labour from Asia, a lack of available skills in the UK, and uncertainty around future trading arrangements. This should see consecutive contractions this year and next.
Motor vehicles also represents a concern to our 2018 outlook. After healthy year on year growth rates stretching back to 2010, the sector is expected to see a continuation of the slowing trend we saw in 2017, in which the sector expanded by 0.2%, its weakest growth since the financial crisis. While Brexit related risks dominate the media narrative, there is an increasing concern that the sector has reached saturation point, with large falls in output in the domestic market, driving the overall decline. Demand for diesel cars are also likely to be impacted by fiscal policy announced in the Autumn Budget. We are forecasting a contraction this year before a small pick-up next.
Elsewhere other transport is set to slow from hugely impressive growth last year (+11.5%). But with orders backlogged at record levels, the sector is still set to post healthy growth this year and next.
Good news on the whole…
Despite some weaknesses across the construction and automotive sectors, as well as Brexit induced uncertainty likely to impact some investment decisions, the outlook for manufacturing remains positive and is reflected in this quarter’s results and our forecasts.
It has to be said our forecasts, especially growth of 2.0% in 2018, are healthy. It should be noted however that this is predominantly, as we have been saying for a while, a global economy story, with manufacturing across the world, and specifically Europe currently enjoying a sweet spot. Therefore while we have revised up our forecasts, and if they should be realised it will mean another good year for the sector, we still trail our European counterparts, who are set to have an even stronger year, free of the uncertainty generated by Brexit.