Manufacturing confidence rises

Confidence levels in the manufacturing sector jumped in the third quarter, according to research by BDO LLP that looked at confidence levels in the sector over the next six months.

In a survey covering aerospace and defence; food manufacturing and distribution; automotive; engineering; and technology, building materials, chemicals and pharmaceuticals across the UK, 49.5 per cent of respondents in the third quarter were confident about the outlook for their business over the next six months, a rise from the second quarter, when 37.3 per cent said they were confident.

37 per cent of respondents said their confidence levels were unchanged, while 13.3 per cent said they were negative about the next six months.

Those that do feel negative about the prospects for their business over the next six months are mostly engineering and technology/electronics businesses, which have been hard hit by the downturn in the automotive and consumer-electronics industries. Conversely, two thirds of these businesses intend to invest between one and five per cent of turnover in research and development (R&D), indicating expectations of an upturn in 2010.

According to the research, almost a third of companies plan to increase R&D investment, while nearly 65 per cent plan to keep R&D investment at the same level next year. Seven per cent plan to decrease their investment.

In particular, half of pharmaceutical and chemical firms and a third of automotive and building materials firms plan to increase their R&D investment. 28 businesses report spending between two and five per cent of turnover on R&D, with two thirds of these being smaller firms (turnover below £30m) in the engineering, automotive, medical and optical sectors.

These findings mirror the government’s R&D Scoreboard 2008, which found that smaller companies tend to invest a relatively larger percentage of their turnover in R&D because they are growing businesses competing in sectors where technology is constantly changing.

Tom Lawton, head of manufacturing at BDO Stoy Hayward said: ‘Although conditions for manufacturers across most subsectors remain challenging, confidence levels have seen a significant increase since the last quarter. Our findings show that nearly half are now more confident about the next six months, a clear indicator that they believe a real economic recovery is not far off.

‘Also, whereas in Q2 we saw pockets of negative sentiment in the key manufacturing sectors, i.e. the Midlands, confidence levels are now consistent across the UK. Recovery in the sector will probably be a slow process; however, hopes are high that the sector has turned a corner and we are now seeing more consolidation as opposed to contraction, which is further borne out by the recent announcement that Gross Domestic Product (GDP) decreased by 0.4 per cent in the third quarter of 2009, compared with a 0.6 per cent decrease seen in the second quarter.’