After the positive pick-up reported in Q3 2018 manufacturing output balances have decreased over the past three months to 22%, according to a report by manufacturers’ association Education Endowment Foundation (EEF).
The group said this is still “positive” and “over the trend of the last six years”, however, it is “heading down from the heights reached in the second half of 2017”.
The EEF did note that for the the second year in a row output, orders, employment and investment intentions showed “no minus signs in front of their balances”. However, compared with last year, it said the trend is “heading in the wrong direction” and the “great performance of 2017 has not been replicated in 2018”.
Looking at the numbers, some concerns are linked to the divergence between output balance and total orders, and the gap between the two indicators is the largest seen since 2015 could hint that part of production is more related to stockpiling rather than actual demand.
In the last year and a half, the EEF highlighted several times how export was the big factor behind manufacturing expansion, and although the balance in Q4 remains in positive territory it is a “worrying sign to see such a sharp contraction from 24% to 12%”.
The three reasons behind it are related to:
- Slowdown of the global economy, in particular of the EU market which remains the largest UK destination by far.
- The “exhaustion” of the sterling devaluation effect. The competitiveness gain obtained after the EU-referendum currency plunge has almost completely faded away.
- Concerns about Brexit and related disruption to trade. The risk of delays or goods stuck in UK and EU ports are pushing international partners to hold-off some of their orders. This seems to be confirmed by the expected pick-up in export orders in the next three months when, hopefully, we will have more clarity around the future trade landscape.
A statement by the group read: “Not surprisingly considering the slowdown in orders, the expansion of the previous quarters, and the increase in Q3, employment balances are also down. Here as well, the balance remains positive, however the 12% recorded is the lowest level in the last two years.
“Investment intention in the next 12 months is a similar story, with a tiny positive balance of 7% after the surprisingly high level registered in Q3.”