Manufacturing sector reaches pivotal point in its recovery

Richard Rose

The UK’s manufacturing sector has reached a pivotal point in its recovery, a new report claims.

In its latest Business Trends Report, BDO said its Output Index – which indicates how businesses expect their order books to develop over the next three months – had risen to 95.1 in July from 94.9 in June.

The growth, while minimal, is nevertheless important as it sees output climb above the point of contraction – set at 95.0.

The return to output growth is attributed to the improving performance of the manufacturing sector as the services sector output continues to contract.

Separately, BDO’s Manufacturing Output Index increased to 98.6 in July from 97.6 in June, and is rising closer to the long-term growth trend at 100.

While the recovery of the UK’s manufacturing sector is encouraging for the health of the UK economy as a whole, the sector only represents about a tenth of the UK’s entire economic output.

BDO concludes its resurgence therefore has only a marginal effect on the overall growth of the economy.

BDO’s Services Output Index remained at 94.4 for the second month running, 0.6 below the point of contraction of 95.0. According to ONS figures, the services sector grew 0.5% in Q2 of 2017, but the Services Output Index indicates that order books in the sector are set to shrink in the coming three months, which would leave the growth of the UK economy stuttering towards the end of 2017.

BDO’s Optimism Index suggests a more positive outlook for early 2018, particularly for manufacturers. The Optimism Index – which indicates how firms expect their order books to develop in the coming six months – increased to 103.0 in July, from 102.9 in June.

Echoing this month’s Output Index, the manufacturing sector is responsible for the increase. The results show that UK Manufacturers are expecting a flurry of business activity, with its sector Optimism Index climbing to 121.4, well above the long-term trend.

However, the services sector outlook for 2018 is less optimistic. Its sector Optimism Index has fallen 0.1 to 99.5 in July, below the long term trend but still in growth territory. The overall outlook from UK services has been on a downward trend since 2015, but this has been more distinct since the EU referendum.

Commenting on the findings, Richard Rose, Midlands Tax Partner, BDO, said: “Amidst slowing growth in the economy as a whole, UK manufacturing is a definite bright spot at the moment.

“However, our sense is that the recovery is weakening month on month.  Given the continuing ability of the UK to create jobs at a surprisingly fast rate and the continuing relatively high levels of inflation, we can understand the calls for a hike in interest rates.

“But considering the economy’s direction of travel we think that tightening monetary policy at this stage would be a mistake.  Further, we think that there is a role for a somewhat more expansionary fiscal policy when Brexit uncertainty starts to bite further as we go into 2018. The Chancellor cannot increase current spending without increasing taxes.  But we think that the markets would be happy to see him borrow more for investment in our productivity and growth potential.”

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