UK Manufacturing Recovery Faces Headwinds

The UK’s manufacturing sector is recovering on the back of strong domestic and export demand, according to the Confederation of British Industries. However, high production costs and supply constraints caused by the Japanese Earthquake could slow any nascent revival.

Car Manufacturing
Car Manufacturing

Domestic orders increased by 15 percent and export demand grew by 24 percent, the fastest since 1995, according to the CBI’s Quarterly Industrial Trends Survey.

Of the 451 manufacturers who responded to the survey, 36 percent reported an increase in output over the past three months, with 15 percent saying that they had seen a reduction in orders.

Manufacturers expect both output and demand to grow across the next quarter. However, order book growth was down 11 percent across the period.

While the quarterly figures show stronger growth, much of this was posted early in the year, and April’s data suggests that the sector’s growth is “going off the boil a little bit,” according to Howard Archer, chief UK and European economist at IHS Global Insight.

“The manufacturing sector is doing pretty well, but it’s not where it is two or three months ago…the factors supporting its growth are starting to wane. The headwinds facing the sector will be picking up,” Archer said.

Recent growth in domestic demand could fall away as the government’s fiscal tightening begins to take effect. Concerns over sovereign risk in the euro zone, a major market for UK exports, continue to weigh heavy.

With oil prices remaining resolutely above $110 per barrel and other input costs remaining high in step, production costs have increased, as have domestic and export prices. April data from the UK Office for National Statistics shows that producers’ input prices rose 14.6 percent year-on-year.

Output prices rose in step, suggesting that companies are passing on cost rises to consumers, which could make them less competitive in the longer term, Archer noted.

Some industries, such as automotive manufacturing, could also suffer from the knock-on effects from the tsunami which devastated large areas of Japan in March. Carmakers in particular have faced shortages of parts due to factory shutdowns in areas hit by the disaster. Toyota, Nissan and Honda are among those who have said that they will cut production at UK sites in May.

Industry accounts for around 17 percent of the UK’s GDP and 8.5 percent of its jobs. Policymakers have been concerned by slow progress in job creation across the country and a high unemployment rate of 7.8 percent, and may be encouraged that the sector reported that it has added staff for the third quarter running, with 15 percent of companies hiring in the past three months.

Recession Shook Out Industry

A long-term decline in employment in the sector – from 5.2 million to 3.1 million jobs between 1990 and 2008, according to the Department for Business, Innovation and Skills – is unlikely to be reversed, Archer said. However, he added, “I think the recession probably did shake out the sector somewhat. It may be a bit of survival of the fittest and the companies that survived the recession could be stronger in the long term.”

Philip Hines, who covers industrial products at PWC, agreed that larger companies in particular have weathered the downturn well, but they did so by improving efficiency and productivity, sometimes at the cost of jobs. These, traditionally, are low-skilled jobs.

“There are encouraging noises,” he said, “but jobs that go in a recession tend not to come back.”

The need for the UK economy to diversify away from financial services has become marked in the aftermath of the economic crisis, and the government’s 2011 budget claimed a new focus on strengthening British industry, particularly in renewable energy and environmental services.

This provides its own challenges around recruitment, and the sector’s ability to exploit these niches will depend on the availability of talent and the transfer of skills from a workforce that is ageing, Hines said.

The 2011 budget included a target to create of 40,000 apprenticeships and 100,000 work placements, aimed at closing the skills gap. A mooted “Green Investment Bank” could provide some stimulus for the emerging cleantech industry. The government also dropped corporation tax and relaxed taxes on assets and on research and development.

Such policy support is vital for investment in green industries, and in manufacturing more generally, Hines said, and the increased engagement by the government and the prominence given to manufacturing could help with recruitment and retention.