Manufacturing rebounds as domestic confidence grows

UK manufacturing has made a dramatic return to growth, with confidence up and output increasing at the fastest rate for almost 20 years.

A series of indicators released in the last few weeks have pointed to a rebound in manufacturing that is helping to drive the UK economy back into growth.

But despite improvements in trade thanks to more stable conditions in the Eurozone, there are questions over whether the recovery represents the long called-for rebalancing of the economy towards manufacturing and exports rather than domestic consumption fuelled by debt and rising house prices.

The latest survey of manufacturers from Markit/CIPS shows that output and new orders increased in August at their highest rate since 1994, another time when the UK was pulling out of recession.

Rob Dobson, senior economist at survey compilers Markit, claimed that the UK’s factories were ‘booming again’ and predicted that growth in the sector could reach one per cent in the third quarter of the year, following the 0.7 per cent growth in the last quarter.

‘Rising demand from domestic customers is being accompanied by a return to growth of our largest trading partner, the Eurozone,’ he said in a statement.

‘Manufacturing is clearly making a strong positive contribution to the economy, providing welcome evidence that the long-awaited rebalancing of the economy towards manufacturing and exports is at last starting to take place now that our export markets are recovering.’

Another survey by manufacturers’ organisation EEF also suggested improvements in output and orders across all sectors of manufacturing, with optimism great enough that investment intentions are at their highest for six years.

But while demand was being driven partly by improvements in the Eurozone, the EEF report showed domestic orders were still stronger in all manufacturing sectors except the export-intensive mechanical equipment sector.

Phil Harrold, a partner at PWC, said the automotive and aerospace sectors had been resurgent for some time but that improved domestic confidence was now helping to boost the rest of UK manufacturing.

‘In recent months we’ve seen housing starts going up, partly on the back of the government’s schemes but also, I think, a general mood of confidence returning,’ he told The Engineer. ‘And that is driving some improved UK domestic demand, which I think is feeding through to those figures.’

And although manufacturing has been performing better than other sectors such as construction, it is still far below its 2008 peak thanks to poor performance over the last couple of years, whereas the services sector has been growing consistently since the recession and is close to where it was before the financial crisis.

EEF’s chief economist, Lee Hopley, said rebalancing the economy by increasing both exports and investment was still needed to move it away from unsustainable growth based on debt-fuelled domestic demand.

‘If we’ve got a good combination of manufacturers increasing their presence in emerging markets and also signs that conditions in the Eurozone are at least starting to stabilise then that could definitely bode pretty well for the UK’s performance,’ she told The Engineer.

‘I think what’s been missing, however, is the investment side. We’ve really not seen much of a recovery in business investment at all and it still remains around a quarter below the levels at the beginning of 2008. Investment intentions have seen an increase but we need that to translate into capital expenditure.’

She added that, although overall figures for 2013 might show a contraction in manufacturing due to a poor start to the year, the recovery was becoming more broad-based and the signs for 2014 were positive even for sectors that have struggled to rebound such as electronics and rubber and plastics.

‘The stars seem to be aligning towards a pretty strong third quarter for the industry,’ she said. ‘We still need many, many more of those to get back to where we were at the start of 2008.’

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