Another year without negative balances
For the second year in a row output, orders, employment and investment intentions showed no minus signs in front of their balances. This is something manufacturers should be proud of.
However, compared to last year, we can doubtless see that the trend is heading in the wrong direction and the great performance of 2017 has not been replicated in 2018.
Output remain positive but orders contracted
After the positive pick-up reported in the third quarter of the year, output balances have gone down to 22%. The result is still positive and over the trend of the last six years, however, it is heading down from the heights reached in the second half of 2017.
Looking at the numbers, some concerns are linked to the divergence between output balance and total orders. The gap between the two indicators is the largest seen since 2015 and it might hint that part of production is more related to stockpiling rather than actual demand.
Export are behind the orders balance contraction
In the last year and a half, we highlighted several times how export was the big factor behind manufacturing expansion and although the balance in q4 remains in positive territory, it is a worrying sign to see such a sharp contraction from 24% to 12%.
The three reasons behind it are related to:
Slowdown of the global economy, in particular of the EU market which remains the largest UK destination by far.
The “exhaustion” of the sterling devaluation effect. The competitiveness gain obtained after the EU-referendum currency plunge has almost completely faded away.
Concerns about Brexit and related disruption to trade. The risk of delays or goods stuck in UK and EU ports are pushing international partners to hold-off some of their orders. This seems to be confirmed by the expected pick-up in export orders in the next three months when, hopefully, we will have more clarity around the future trade landscape.
However, on a positive note, only 18% of the respondents were not able to identify any notable pick-up in demand from any foreign market.
Employment and investment intentions follow output and orders
Not surprisingly considering the slowdown in orders, the expansion of the previous quarters, and the increase in q3, employment balances are also down. Here as well, the balance remains positive, however the 12% recorded is the lowest level in the last two years.
Investment intention in the next 12 months is a similar story, with a tiny positive balance of 7% after the surprisingly high level registered in q3.
The gap between employment and investment intentions remain an interesting story. Since the aftermath of the EU-referendum, companies have shifted their preferences to employment and this is confirmed both by official data, which continues to see a very strong labour market and contracting business investment, and also by our latest Investment Monitor which highlighted how uncertainty has pushed companies to hire more and invest less to keep a high degree of flexibility.
If this is good news for someone looking for a job, or a pay rise, it’s not great for productivity which is the key for long-term prosperity.
On Thursday, we will talk about sector forecasting and our thoughts on manufacturing sub-sectors.