A quick recap on the story so far...
- Official ONS data releases confirm a strong manufacturing performance, from a production and trade perspective, at the close of 2017.
- Our Executive Survey, in partnership with AIG, indicates firm level expectations that growth will continue through 2018.
- Optimism about global economic prospects has staged an especially strong turnaround from this time last year.
- Risks remain prevalent, however, with practical impacts of delivering Brexit front of mind for most.
- Manufacturers are committed to a range of actions to support growing order books and to mitigate risks in the year ahead.
What should policy makers do now?
Number 1 – do something
Inevitably, the first thing on the ‘to do’ list is not to get lulled into a sense of complacency that growth will take care of itself. Headlines that manufacturing output has hit its highest level since 2008q1 is great news. But it’s been a long and bumpy road for the sector to get near to pre-recession levels of output.
With consumer confidence a bit wobbly, concerns from industries such as financial services about future trade arrangements with the rest of the EU and parts of the construction sector under the cosh, manufacturing’s contribution to growth needs to be sustained. And for that we not only need to see global economic conditions remaining favourable, it will also require UK companies to be investing in capacity, efficiency and ideas to compete and succeed in world markets.
And on this measure, our judgement is that the investment outlook is finely balanced. The balance of manufacturing companies planning to raise capital expenditure this year is in the black, but we know that certainty about the final Brexit deal is leading to a cautious approach to expansion for many. At least we can say that there’s not year any sign of a planned Brexodus – companies with firm plans to shift some of their activity outside the UK in response to Brexit uncertainty and exchange rate movements.
Industrial strategy implementation
Number 2 – cement industrial strategy priorities across government. The best time to crack on and be ambitious about industrial strategy is when there’s some momentum behind manufacturing activity, it’s surely tougher to get a course for higher productivity and new technologies in the midst of a crisis. Our Executive Survey shows that manufacturers see industrial strategy as a potential force for good and failure to launch this time would have negative implications for long-term growth.
Getting down to specifics – innovation, exports and people
We’ve consistently said that government decisions in support of industrial strategy should be lined up with the priorities of manufacturers. And topping the strategy list again in 2018 is more focus on process innovation – in response to the need for greater productivity efficiency and to complement automation investments.
EEF research from last year, however, showed that while manufacturers see process innovation as increasingly important not all are undertaking the innovations associated with the highest productivity gains. There was some moves in the last Budget to help companies overcome the cash, certainty and capability hurdles they face, but we’ve identified where focus could turn now.
UK manufacturers are also looking to do more to capitalise on expanding global demand. These efforts also make a regular appearance in our reports on manufacturers’ performance and strategies. The UK’s exit from the single market ups the ante on these efforts – regardless of what the divorce terms are.
Distance, regulations, customs procedures, market knowledge, financing can all play into firms’ prioritisation of new market entry. Government-backed support in some of these areas can make a difference and the industrial strategy commits to reviewing government export promotion services.
There are so many dimensions to the people and skills requirements for industry this year – having a pipeline of skills to fulfil replacement demand; developing the right capabilities to support manufacturers with automation and through their 4IR journey and building world class management and leadership.
But particularly pertinent this year is retaining the skilled EU nationals that are a key part of the manufacturing workforce right across the country. So in addition to some of the positive policy developments on boosting skills in the industrial strategy, government policy also needs to ensure that the business risks from EU nationals leaving the UK starts to diminish. We’ve set out some proposals here and will be returning to this in the coming months.
Tomorrow we’ll be completing this week’s round up of manufacturers look ahead at 2018 with what all this means for our growth forecasts this year.