Suddenly it seems the world’s manufacturers hammered by the recession are firing on all cylinders. Honda has posted record profits, Renault is back in the black, Airbus and Boeing are enjoying a surge in demand, Rolls-Royce is cranking up its forecasts and chemicals group BASF has just doubled its earnings.
In the UK a resurgent manufacturing sector has helped boost overall growth and business surveys have suggested activity is at its highest in more than a decade as factories scramble to meet rising demand at home and abroad.
But economists are warning this is probably going to be as good as it gets and key industry reports published today paint the same picture. The storm clouds may be gathering. For all the talk of rising exports and profitability, manufacturers in the UK remain decidedly nervous about the outlook for a variety of reasons. Public sector spending cuts spell trouble for those companies reliant on government projects, tax rises risk hitting demand and with Greece’s financial meltdown still fresh in their minds, most companies are loathe to say the eurozone is out of the woods.
At the same time business groups warn that the boost factories are enjoying from companies re-building their stocks in the aftermath of the recession cannot last. Most warn it will likely tail off before the end of the year. This inventory-building has been credited with driving the recent jumps in manufacturing output. A closely watched monthly snapshot of the sector due out this morning is expected to show business activity continued to rise in July. But economists will also be scouring the manufacturing purchasing managers’ index for signs of waning confidence.
Analysts will also be watching for any signs of businesses looking to spend again, seen as key to sustaining the recovery given that typically when inventory rebuilding wears off, investment spending re-starts.
The portents are less than promising. The manufacturers’ organisation EEF will warn today that “low levels of investment remains an Achilles’ heel”.
Its Economic Prospects 2010 report is upbeat about the short-term. Manufacturing will grow by 3.8% this year and 3.4% in 2011 outstripping growth in the economy as a whole, forecast at 1.1% in 2010 and 2.1% in 2011.
But it believes investment by manufacturing firms will grow by only 2% in 2010 after falling by more than a third during the recession.
“Investment looks like it will remain a weak point in the remainder of this year with risks and uncertainty still lingering for both manufacturers and the wider economy,” says its chief economist Lee Hopley.
She cites the outlook for interest rates as more uncertainty for businesses. Borrowing costs are set to be held at a record low of 0.5% when the Bank of England makes its latest announcement on Thursday but further out policymakers are having to weigh up fragile demand against stubbornly high inflation.
“Whilst we have more clarity over the government’s fiscal ambitions, attention is now turning to where the cuts will hit and the difficult balancing act facing the Bank of England and when the monetary policy committee will make the next move,” said Hopley.
The EEF report, compiled with accountants BDO, also highlights risks to overseas demand particularly in developed markets such as the US. The world’s biggest economy enjoyed a quick ride out of recession at the end of last year but the pace of growth has tailed off. In the second quarter growth was slower than had been expected at a 2.4% annual rate, according to data last week that sparked more talk of a double-dip recession.
British manufacturers are also wary about the prospects for the eurozone, a key trading partner. Industry groups are already noting a divergence between those companies that export close to home and those enjoying stronger growth thanks to business with emerging markets such as China and India.
Roger Bootle, economic adviser to Deloitte is gloomy about the eurozone’s prospects and what that means for UK businesses as they battle through George Osborne’s tax rises and spending cuts.
“The prospect of a trade boost, at least in the near-term, is looking rather less promising than a few months ago,” he says.
A fall in the pound has provided UK exporters with a chance to boost their competitiveness. But Bootle notes businesses are only likely to capitalise fully on that once demand has recovered sufficiently.
“About half of the UK’s exports go to the eurozone and, given recent events, we now expect GDP growth there next year of just 0.5%... So export growth is unlikely to pick up any further over the next year or two,” he adds.
A separate survey published today suggests manufacturers remain distinctly more upbeat than those businesses in the larger services sector and yet they are still wary about demand holding up. Almost two-thirds UK manufacturing firms expect a rise in business activity, according to KPMG’s global business outlook. Manufacturers in the UK have higher hopes for the year than their peers in many global economies, including China, although they were less upbeat than those in Brazil, the US and India.
But again, any confidence about activity was not translated into plans to invest. In fact investment intentions fell, according to the survey, compiled by research firm Markit.
“I fear storm clouds may still be gathering on the European horizon. There are now a number of key economies that are actively tackling national deficits and this must surely have a significant effect on the sector some way down the line,” says KPMG’s Gautam Dalal. •Business group CBI is similarly cautious. Its quarterly survey of small and medium-sized manufacturers today shows twice as many saw output rise over the last three months than saw it fall. That was the strongest outturn for 15 years and driven by rising demand at home and abroad as customers rebuilt their stocks in the wake of the recession. But looking ahead to the next three months, firms anticipate a slight fall in output and demand while for the year ahead they expect to invest less.