Economy sluggish despite upturn in manufacturing sector

The UK’s economy grew at a muted rate in the third quarter of 2017 despite improvements in the manufacturing sector.

manufacturing sector

This is the conclusion of the British Chambers of Commerce’s latest Quarterly Economic Survey, which canvassed over 7,100 businesses in the private sector.

The proportion of manufacturing firms reporting improved domestic sales and orders both rose in the quarter to their highest level since Q1 2015. Export sales and orders also improved, as stronger recent economic growth in a number of key markets has helped support demand for UK products.

In the services sector domestic sales and orders remained static, as did the sector’s employment expectations, investment in training, and confidence in profitability and turnover. Almost all services indicators remain below their pre-EU referendum levels, with consumer-focused businesses reporting weaker growth rates compared to B2B firms.

The results of the survey also show the prevalence of recruitment difficulties facing UK businesses, which worsened further in Q3. Almost three-quarters of manufacturers reported difficulties hiring staff, and in services, the percentage rose to its highest level since Q1 2016, and stands at three times the long-term average.

According to BCC, the upcoming Autumn Budget should be used to stimulate the economy and begin to address some of the issues undermining the UK’s growth prospects, including skills gaps, high upfront costs and aging infrastructure. With Brexit-related uncertainty growing, the Q3 QES highlights the need for action to support a competitive and enterprising business environment.

Key findings in the Q3 2017 survey:

Manufacturing sector:

The balance of firms reporting increased export sales rose from +27 to +29, and export orders from +20 to +24, the highest level since Q1 2015. The balance of firms reporting improved domestic sales also rose from +20 to +24, and orders from +15 to +21, also to the highest level since Q1 2015

The percentage balance of manufacturing firms expecting the price of their goods to increase over the next three months remains well above the historical average, rising slightly from +34 to +35. This is mainly driven by pressures from the price of raw materials, with 61 per cent reporting it as a cause of price pressure (up slightly from 60 per cent in Q2)

The percentage of manufacturers attempting to recruit increased, rising from 65 per cent to 71 per cent. The percentage of firms reporting greater recruitment difficulties rose from 71 per cent to 74 per cent

Confidence in the manufacturing sector rose slightly, with +51 of firms confident that turnover will increase over the next 12 months – but profitability confidence was +34

Dr Adam Marshall, director general of the British Chambers of Commerce, said: “The uninspiring results we see in our third quarter findings reflect the fact that political uncertainty, currency fluctuations and the vagaries of the Brexit process are continuing to weigh on business growth prospects.

“The chancellor’s Autumn Budget is a critical opportunity to demonstrate that the government stands ready to incentivise investment and support growth here at home. A failure to act, or a conscious choice to provide a short-term sugar hit to the electorate rather than the protein boost the economy needs, would have significant consequences for the UK’s medium-term growth prospects.

“While much of Westminster and Whitehall is distracted by Brexit, business needs action now on the home front. The solutions to some of the biggest issues currently facing our firms – including high up-front costs, a lack of incentive to invest, and a need for better infrastructure – are entirely within the power of the UK government to deliver.”

Industry view: Graeme Wright, CTO Energy & Utilities at Fujitsu UK & Ireland: “While the manufacturing sector is going from strength to strength, leaders will need to be savvy in order to continue to thrive in an era of digital disruption. In a recent Fujitsu study, 90 per cent of manufacturers said they believe the sector will transform fundamentally by 2021.

“Technology has always been a fundamental part of the manufacturing industry, but it is essential that organisations are built in a way that allows them to continually embrace innovation, and the new possibilities technologies like artificial intelligence, wearables and the Internet of Things can offer.

“In tandem with this, the clamour for skills simply cannot go unaddressed. Educators need to open their doors to industry partners who can help bring more advanced technology into the classroom, provide advice and examples of the skills employers are looking for and adapt the syllabus accordingly, and, most importantly, provide opportunities for students to gain real world experience.

“Over the coming months we expect to see new opportunities for manufacturers to adapt their business models, enhance their value, establish new services and move into the era of servitisation. The impact of digital is now inevitable, but it needs to be supported by a skilled workforce in order to feed its growth.”