In past weeks, a number of surveys of the manufacturing sector have given us grounds for cautious optimism. With the banks having posted a mixed-bag of half-year results recently, most observers believe the worst may have passed for this particular sector, so attention has now turned to the ‘real’ economy, where cash flow, order books and staffing levels continue to exercise the minds of industrial leaders.
According to the results of research published last week by accountants and business advisers BDO Stoy Hayward LLP, which looked at confidence levels over the next six months, manufacturing is ‘generally positive’ about the economy. In its survey of UK industry - including aerospace and defence; food manufacturing and distribution; automotive; engineering and technology - 37.3 per cent of respondents were positive about the next six months, with only 14.7 per cent being negative. Some 48% per cent of respondents said their confidence levels were unchanged from the beginning of the year.
When companies were asked if they expected a decrease in margins, results did vary according to geographic, sub-sector and company size. Nearly 37 per cent of respondents expect margins to fall and 33 per cent expect them to stay the same over the next 6 months.
Companies with turnover of less than £300m in the engineering, metal products and technology manufacturing sectors were most downbeat, with nearly 48 per cent of engineering and nearly 46 per cent of manufacturing and technology companies expecting margins to slide. Smaller engineering and metals products companies, in particular, are gloomy compared with other sectors.
For both larger businesses (turnover of more than £300m) and smaller businesses (turnover of less than £300m), the most pressing issues were cash flow and sales. Companies also voiced a number of other concerns, including an inability to insure debts; increasing government red tape; credit insurance on new foreign accounts; avoiding breaching financial covenants imposed by banks, and the weakness of Sterling.
Tom Lawton, who looks after the manufacturing sector at BDO Stoy Hayward says the numbers are, overall, more positive than were expected at the time of the survey. “There are indications that the sector is starting to improve, following an extremely difficult yea,” he says. “Manufacturers are having to work harder than ever to cope with the economic slowdown and issues such as falling sales and cash flow continue to weigh heavily on both large and small companies. It’s also interesting to note that a number of companies of all sizes cite government red tape as one of their biggest headaches.”
The CBI, too, spots something a little brighter on the horizon. In its most recent Quarterly SME Trends survey, the rate of decline in orders and output among the UK’s small and medium-sized manufacturers is apparently slowing. Moreover, medium-sized companies are predicting a return to growth in the next quarter, thanks to an improvement in export orders.
Of the 480 small and medium sized firms surveyed by the CBI, 51% saw the volume of total new orders fall in the three months to July, while 17% reported a rise. The resulting balance of -34% is an improvement on the previous quarter’s balance of -51%, which was the worst figure since the survey began in 1988. The volume of manufacturing output continued to fall with 43% of firms saying it declined, and 15% saying it rose, giving a balance of -28%. This marked a slower rate of decline than the previous quarter’s survey low of -48%.
Looking ahead to the next quarter, expectations for volumes of total new orders (a balance of -8%) and output (-9%) remain negative for small and medium sized firms as a whole, but medium-sized companies are predicting an export-led bounce in orders and output.
Optimism about the business situation among small and medium-sized manufacturers is falling at a slower rate (a balance of -9%), compared with a balance of -42% in the previous quarter. Russel Griggs, chairman of the CBI’s SME Council, elaborates:
“Business conditions remain difficult for the UK’s small and medium-sized manufacturers. Orders and output are still falling, but things aren’t quite as gloomy as they were three months ago. So far, the relative weakness of Sterling has not provided firms with much of an export boost. It is therefore encouraging that medium-sized companies are hopeful overseas orders will pick up in the next quarter, helping raise total orders and output. Medium-sized firms are also benefiting from improved access to credit, unlike smaller companies which tend to have fewer funding options available to them.
“The outlook for medium-sized firms looks positive, but it is still too early to say whether export-led growth will deliver a platform for sustained recovery. It is unclear when a return to growth for smaller firms will come, and it is worrying that credit constraints remain a concern. However, we hope these will loosen over the coming months as the flow of finance to SMEs increases.”
Volumes of domestic orders remained weak in the previous three months (a balance of -38%), and are expected to shrink again in the next quarter (-13%). Despite the relative weakness of Sterling and aggressive cost cutting, volumes of export orders shrank by more than expected in the three months to July (a balance of -32%). They are expected to decline again in the next three months, but at a much slower rate (a balance of -9%).
However, firms are the most optimistic about export prospects since April 2007 (a balance of 5%), and medium-sized companies expect the volume of export orders to rise in the next quarter (a balance of 27%). This would push the volume of total orders for medium-sized firms into the positive (a balance of 10%).
Firms have continued to reduce their headcount in the last three months. Some 40% cut numbers employed, while 8% took on staff, giving a balance of -32%. That is a slightly slower rate of decline than the previous quarter (a balance of -44%).
But while these indicators do suggest an easing of the situation, access to credit and finance is continuing to constrain some firms’ export and output plans, particularly those of the smallest companies. Firms are still running down their stocks aggressively and seven out of ten firms are working below capacity.
Meanwhile, the Association for Consultancy and Engineering (ACE) suggests there is cautious optimism among sector companies, which it will reveal in more detail next month in its annual State of Business report. Findings from this 32-page document - compiling answers from a sample of members surveyed over five main sections - indicate that while the current economic climate is challenging, there are still opportunities for growth in the consultancy and engineering sector. Chief executive Nelson Ogunshakin said that while many member firms had found the last twelve months tough going, the situation was not all doom and gloom.
"Considering this report has been produced against a background of economic stress, the results could have been far worse," he said. "We're not trying to pull the wool over anyone's eyes - the past year has been devastating for some companies and that is an unpleasant but unavoidable truth."
ACE recently published an executive summary in anticipation of this year's report, which will be launched on 7 September 2009. It pointed to a decline in construction output over the near term as well as constrained public spending, a difficulty in maintaining staff levels and limited access to skills. This year's full report is expected to show the effects on ACE member firms of a challenging 12 months for the consultancy and engineering sector, with workloads and fee levels coming under heavy pressure while competition for each tender has also increased.
"When the credit crunch developed into a full scale economic recession, it presented the biggest challenge to the industry in almost 20 years," said Mr Ogunshakin. "Challenging times and tough decisions still lie ahead, although levels of confidence and investment should begin to strengthen through 2010."
Les Hunt
Editor