Manufacturers remain under pressure

Large sections of manufacturing remain under intense pressure, with escalating costs and tight margins offering little prospect of a significant pick up in the foreseeable future, according to a survey published today.

The fourth quarter Business Trends Survey, published by EEF, the manufacturers’ organisation and RSM Robson Rhodes, shows growth continuing for the tenth consecutive quarter. However, it is at a minimal pace with margins under severe pressure from a range of escalating costs, in particular energy, and global competition. For the second consecutive quarter, more companies report price falls rather than increases.

The survey shows that export orders are showing healthy growth, while domestic ones have now declined for three consecutive quarters. While this suggests that the economy is re-balancing from its dependence on consumer spending and towards more export led growth, the Bank of England will remain vigilant for further signs of weakness in the UK economy.

The survey also suggests that tax rises would be damaging to the economy and the focus should be on controlling government spending. As a result, EEF used the survey to re-iterate its call to the Chancellor not to impose any further costs on industry in Monday’s Pre-Budget statement.

Commenting on the survey, EEF Chief Economist, Steve Radley said: “With declining domestic orders pointing to weakness in the UK economy, it is vital that the government does not increase taxes in the pre-Budget or add further costs on business when margins are tightly squeezed.”

By sector, electronics remains upbeat with firms reporting robust growth. Mechanical equipment and other transport equipment remained strong, mainly on the back of aerospace which accounts for approximately 60% of the sectors output. Conversely, metals and motor vehicles reported another weak quarter, whilst electrical equipment saw the first decline in two years.

The regional picture was similarly mixed. Growth in electronics and aerospace led to positive output balances in the south west and Scotland. However, the decline in motor vehicles continues to have a negative impact on the West Midlands, which has contracted in three out of the last four quarters. Deteriorating conditions in metals led to a sharp decline in the north east, albeit in contrast to rapid growth earlier in the year.

Severe pressure on margins continues, with no outlook for improvement in the next three months. Firms across all sectors report little or no pricing power, a situation compounded by rising costs. Energy in particular has had a great effect, especially on energy intensive sectors such as metals.
As a result of tight margins and modest growth, the recovery in investment continues to be delayed, whilst job cuts across manufacturing are widespread in order to tackle costs. Firms in motor vehicles are bearing the brunt of job losses.

Looking towards 2006, the economic forecasts and survey results point to moderate growth, mainly on the back of export orders. However, this picture differs by sector with electronics, mechanical equipment and other transport equipment expecting better conditions, whilst motor vehicles and metals are more negative.