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The next 12 months promise a bumpy ride in terms of market conditions, but engineering firms remain confident that they can survive and many believe that the sector will outperform the rest of the economy.
Those were the main messages from a heavyweight piece of research from the manufacturers’ organisation the EEF, which surveyed the views of more than 500 member companies. The report, Economic Prospects 2011, suggested that most firms expect to record a strong performance over the next 12 months, buoyed by solid growth in export orders, particularly to emerging markets. It also showed that growth for the economy is set to be better balanced as investment and net trade finally start making sustained positive contributions.
But, despite the broadly upbeat findings, there was a note of caution, with a separate survey predicting direct impacts on manufacturers as sharp government spending reductions start to bite. The spending review last October was one of the most anticipated announcements from the new government.
But companies fear that it will be 2011 when government expenditure will begin to fall substantially. Cuts to welfare and capital budgets were significant, and few government departments got off lightly.
On a positive note there is greater certainty: 45% of manufacturers said that there will be greater market confidence in the UK’s ability to control the budget deficit. However, just less than a fifth of companies expect that the government cutbacks will lead to a direct loss of orders – transport manufacturers are particularly concerned about this, with a third predicting a loss of orders from government contracts. Additionally, 40% of companies expect that they will experience a loss of orders through their supply chain. As well as lost orders, 26% of businesses are concerned about the negative impact of cuts to business support and skills programmes.
Indeed, there have already been some high-profile contract losses and job cuts in the engineering and manufacturing sector which come as a direct result of government prudency. At the end of last year Qinetiq had to write off £37 million after the Ministry of Defence scaled back plans to invest in a defence technical training facility at St Athan in South Wales. BAE Systems, Europe’s biggest defence contractor, also announced plans to cut 1,300 jobs because of defence cuts, mostly on Nimrod and Harrier aircraft programmes.
These were headline-grabbing losses, but, when programmes are cancelled or scaled back, the impact is eventually felt all the way along the supply chain.
The report also highlighted other areas of concern in coming months:
- The Eurozone crisis: So far the drop in exports to Europe has been more than offset by strong export growth in emerging markets. However this could be put at risk if the Eurozone crisis intensifies or, in a worst-case scenario, imperils the banking system.
- Access to finance remains a key enabler for business investment and growth. The flow of credit remains seriously weakened by the financial crisis and an EEF survey suggests the cost of finance is improving only slowly.
- Commodity price rises: After already feeling input price pressure in 2010, manufacturers are looking to pass some of this on in higher output prices. But strong demand from emerging economies could drive rises even further than EEF’s central forecast, potentially adding to inflation.
So it seems certain that the next 12 months will have more than its fair share of ups and downs. But the EEF’s chief economist Lee Hopley says firms should stay positive, and that the year brings much greater promise than 2010.
“At the start of 2010, shell-shocked from the worst recession in 80 years, forecasters were wary of predicting anything more than very modest growth.
But manufacturing delivered its best performance in 16 years. “Manufacturing now looks set to be at the heart of the rebalanced growth the economy needs, with sectors most exposed to international markets likely to post the highest growth.”