Manufacturing in 2018q3 - humming along but heading for a crossroads?
Manufacturing activity holds up going into 2018H2
Our new survey marks the eighth quarter of positive output and orders balances on the run. At 27% apiece, both balances were up a touch from last quarter and the new orders picture, in particular, was better than predicted.
European demand in the driving seat
The still buoyant global backdrop continues to dominate in our survey. The export orders balance maintains its lead over domestic demand on the past three months, a trend that has been evident since the start of 2017.
A fairly consistent (and modest) one in six companies has been unable to point any markets offering growth opportunities over the past two years. Also consistent has been the dominance of Europe among those identifying improving demand around the world. In the past three months, the proportion of manufacturers seeing positive demand emanating from the continent has picked up from 53% in q2 to 62%. This improvement chimes with ongoing expansion of activity seen in the eurozone PMIs.
Europe is by no means the only growth opportunity – the share of manufacturers seeing growth in the US was also on the rise this year. Unsurprising given the broad based growth this year and the upbeat prospects for the US.
Investment shows a welcome revival, but …….
So it’s generally a positive picture and our forward looking indicators point to more of the same for production and new order in-take in the final months of this year. Another positive development is the recovery in margins seen in the past three months, with the balance of responses on margins on domestic sales making it into positive territory for the first time in over four years. The fading effects of sterling’s drop and pass through to higher input costs has no doubt helped.
Decent order books combined with margins improvement has supported a strengthening of investment intentions. This is good news, given the subdued outlook for business investment across the economy. But, it is not a trend evident across all sectors. We will dig into sector performance on the blog later in the week, but the booming and now capacity constrained electronics sector and a basic metals industry still on the up are doing much of the heavy lifting on investment plans.
Notably, we still don’t think this is necessarily enough. While investment intentions tracked output expectations up to mid-2016, capex plans have been trailing over the past two years – suggesting firms are not spending as much as they might have done post-referendum.
Risks, opportunities and forecasts
Anyway – for now companies are looking at their order books and developments in some of their key markets and have some confidence that they can sustain their business performance over the next 12 months.
There are, however, renewed concerns about medium-term prospects for the UK economy, with confidence levels dropping back this quarter. Increasing risks around the UK and EU failing to agree a Brexit deal are likely to be playing into this. Indeed as we approach the European Council meeting later in the autumn, together with the risks for further escalation in trade tensions – it may not necessarily be plain sailing into 2018.
We’ve factored this into our GDP outlook for this year and next, with our UK growth forecasts unchanged at 1.2% and 1.3% this year and next. But our manufacturing projections have been pushed down from 1.9% in 2018 to 0.9%, with a modest 0.5% growth still pencilled in for next year.