Britain’s manufacturers have slashed investment in a battle to stay afloat despite improvements in output and orders from the historic lows of the last quarter, according to a major survey published by Make UK and business advisory firm BDO.
According to the Make UK/BDO Manufacturing Outlook Q3 survey the balance on investment intentions fell to -32% from -26% in the last quarter. Whilst not reaching the levels of cutbacks seen during the financial crisis as yet, the trend downwards is following a similar pattern to that seen at the end of 2008 and beginning of 2009.
By way of an indicator as to how far investment has been cut back this year the balance in the first quarter was +20% as industry bathed in what seemed greater political certainty following the general election. The biggest cutbacks were in Yorkshire & Humber, Wales and Scotland.
Make UK also warned that given the uncertainty surrounding the Brexit negotiations and the very real possibility of ‘no deal’, the combination of that outcome with the continued impact of the pandemic could cause further damage to investment prospects in the latter part of the year.
Manufacturing has begun to climb away from the abyss that it stared into earlier in the year. But, make no mistake it is going to be a long haul back towards normal trading conditions, with talk of a V shaped recovery nothing more than fanciful.
Having emerged from three years of political uncertainty at the end of last year, increasing talk of a final ‘no deal’ exit from the EU would be a final nail in the coffin for many companies. If we are to avoid this and, the avalanche of job losses that would follow in already hard hit areas and sectors, it is essential that the first step towards a fuller recovery is provided by a comprehensive trade agreement with the EU.
No-one is in any doubt about the financial challenges facing manufacturers, but turning the investment taps off now will have serious medium to long term implications. The Government must be alive to this risk and provide the support required to help UK manufacturers through this transition period and beyond. Other countries (perhaps in particular Germany) do provide good examples of consistent long term support to their manufacturing sectors. The UK should look to adopt a similar approach.
According to the survey the balances on output improved to -36% from -56% in the last quarter which was the lowest balance ever recorded in the 30 year history of the survey. UK and export orders also improved from similarly historic lows to -36% and -34% respectively.
More encouragingly, companies expect the prospects for industry to continue moving in an upward direction with the balance forecast for output for the next three months improving to -7%. Whilst still negative this would represent a significant improvement from the -56% balance recorded in Q2.
By sector there were marked differences with Basic Metals reporting a shockingly bad balance of -75% as demand for steel dried up from the automotive and aerospace sectors. By contrast, other sectors such as electronics, machinery equipment and electrical equipment all improved in line with the UK averages with the forecasts for the next three months showing a continued improvement.
Despite the improvement in business conditions since the start of the crisis however the employment balance weakened since the last quarter, falling to -29% from -22%. This would indicate that manufacturers are cutting back on staff, though whether it means companies are adapting to the new environment by improving productivity with fewer staff remains to be seen.
In line with other recent economic indicators of an improvement in business conditions almost a fifth of companies are now at full operating levels (17.6%) while a further 28% are operating between three quarters and full capacity. Looking forward over a quarter (27%) expect to be at full capacity at the start of 2021 while a further third (35.4%) expect to be between three quarters and full capacity.
Given the impact on the sector Make UK is now forecasting that manufacturing output will fall by almost 11% (10.9%) while it has downgraded its forecast for recovery in 2021 by more than a full percentage point from 6.2% to 5.1%. GDP is forecast to fall by -8.5% this year before recovering by +10.1% in 2021.
