The pace of the downturn in manufacturing has accelerated in the first quarter of this year and shows no signs of easing, according to the latest Engineering Employers Federation (EEF) survey of companies, which was conducted between January 29 and February 18, with 782 responses. The first quarter survey shows a number of indicators hitting record low levels, and the EEF warns that the sector faces a significant squeeze for the rest of this year with only a minimal recovery in 2010.
EEF chief economist Steve Radley believes that there is simply no hiding the fact these figures make grim reading. “The past three months have been extremely difficult for manufacturers, with markets at home and abroad showing severe declines,” he says. “However, whilst few firms expect things to get better in the near future they are also focusing on making sure they are ready to take advantage of the eventual recovery.
“The priority for government remains getting credit flowing again and helping companies to invest,” Mr Radley continues. “In addition, there is now an urgent need to support companies in hanging on to the skilled workers they will need for when the upturn comes. Government must now consider all possible avenues to help companies deliver alternatives to redundancy.”
Mr Radley believes the debate on interest rates is now largely academic given how low they are already and the limited potential for further cuts to have any effect. Business is now looking to the government and the Bank of England to ensure that well-run firms are able to access the credit they need to run their operations.
With output and orders hitting record lows and growth forecasts revised downwards for 2009 and 2010, the survey suggests that manufacturing job losses will climb to 140,000 this year. In terms of output and orders the balances fell sharply to historic lows of -39% and -54%, respectively. The decline in the total new orders balance was driven by a sharp decline in both domestic and export orders.
Reflecting the significant downturn in the domestic economy, the balance of responses on domestic orders fell to -54%, from -26% in the fourth quarter of 2008, whilst the export orders balance declined to -43% from -10%. Only 15% of respondents reported an increase in export orders, suggesting the global slowdown may have prevented the weaker pound providing a significant boost to export orders.
The downturn has now spread to all sectors and regions. Firms in the motor vehicles sector reported a sharp fall in both output and orders as balances hit -91% and -89% respectively. This has had knock-on effects on firms in the metals sectors that supply car manufacturers. After motor vehicles, the metals sectors reported the weakest output and orders balances.
As was the case in fourth quarter 2008, the weakening automotive sector has impacted on the West Midlands economy, which posted the weakest output balance of -63%. Similarly, the West Midlands posted the weakest orders balance, coming at -69%, from -31% in fourth quarter 2008. Weak orders balances were also reported in the East Midlands and Eastern region at -59% and -55%, respectively.
As might be expected, the slowdown is now having a significant impact on employment and investment intentions. The employment balance fell to -37%, down from -13% in fourth quarter 2008. Large companies, with more than 200 employees, were the most likely to report job cuts. Similarly, continued downward pressure on cash flow has led a balance of 45% of companies to cut back on their investment plans. The EEF believes this could have potential implications for companies when demand does eventually pick up again.
Given the speed and scale at which the downturn has hit manufacturing, firms are extremely pessimistic about the next three months. The forward-looking output and orders balances also hit new record lows of -41% and -42% respectively. In response, EEF has downgraded its economic forecasts with manufacturing output falling this year by 8.6% with only a pick up of 0.2% in 2010. In engineering, output is forecast to decline by 10.9% in 2009 and by 0.9% next year.
Keep abreast of events
EEF’s blog site www.eef.org.uk/blog provides up-to-the-minute views on manufacturing and the economy. Similarly, the Forum of Private Business’ (FPB’s) ‘Economic Downturn Panel’ of members, which acts as a small business barometer during the current economic downturn, provides a monthly update of the impact of the recession on small businesses. The upcoming dates for the release of the figures are Friday 13 March, Friday 17 April and Friday 15 May.
The FPB also surveys its membership on a quarterly basis. Called Referendum, this survey focuses on the key issues affecting small firms. Results will be published covering the following topics in 2009. Wednesday 18 March: impact of the Pre-Budget Report; Thursday 18 June: cost of compliance; Friday 18 September: tax, and Friday 18 December: barriers to employment. Visit www.fpb.org for more information.
Les Hunt
Editor