Manufacturing growth flattens but economic picture becomes more sustainable say experts

THE West Midlands seems set to enter a period of calmer economic growth than that experienced at the start of the year, latest output figures have suggested.

The PMI output figures for April tend to suggest the region appears to be entering a period of slower, but still robust, expansion following the rapid growth spurt seen around the turn of the year.

Nevertheless, hopes remain high that the recovery can be sustained and that the year will still see positive growth.

The latest PMI figures for the region show that in April, output growth eased further from February’s peak. This is attributed to a weaker increase in new business and a fall in the rate of outstanding business.

The latest Lloyds Bank Commercial Banking West Midlands PMI report showed activity growth slowed further from the survey-record high seen in February to the weakest in 10 months. This reflected a moderation in growth of incoming new business.

Backlogs of work were depleted at a sharper rate, partly reflecting a faster increase in staffing levels. Input price inflation remained subdued, while output charges fell for the first time in almost a year.

The index measured 56.9 in April, down from 58.2 in March. Although still indicative of robust growth, the latest index reading was below that registered for the UK as a whole (59.2).  

New business growth also eased in April. The latest rise in new work received by West Midlands private sector companies was the least marked for a year.

Andy Youngman, area director SME Banking in Birmingham, Lloyds Bank Commercial Banking, said: “Output growth in the West Midlands weakened further from February’s peak in the latest survey period, hitting a ten-month low. This mirrored a weaker rise in new business intakes. Moreover, backlogs of work fell at their most marked in just over a year, suggesting ample spare capacity. The region seems to be entering a period of slower, but still robust, expansion following the rapid growth spurt seen around the turn of the year.”

Accountancy firm BDO is slightly more positive. It said manufacturers’ strong growth expectations raised the prospect of a more balanced economy.

It said its own figures suggested growth prospects for the rest of 2014 had strengthened in April as confidence within the sector rose to a new all-time high.

Confidence levels were higher among manufacturing businesses than they were for the service sector.

In a sign that the economy is rebalancing away from its reliance on the services sector, BDO’s Manufacturing Optimism sub-Index jumped to 120.8, up from 119.4 last month, as growth in the Eurozone helped boost export orders.

The stellar performance among manufacturers was reflected by BDO’s Optimism Index rising to 104.3, the highest rating ever in the index’s 22-year history.

BDO said this pointed towards continued strong business performance in both sectors over the next six months.

Further signs that accelerating growth is being driven by manufacturing are shown by BDO’s Output Index, which predicts short-run growth expectations. It rose by 0.1 to 113.0, driven solely by a lift in the BDO Manufacturing Output sub-Index, which jumped from 112.8 to 113.5 – far above its long-term average of 100.

In comparison, the services sector index, which accounts for over two-thirds of the UK economy, has remained flat since the beginning of the year, albeit at a level which indicates strong growth expectations.

Commenting on the latest findings, Richard Rose, partner and head of BDO in Birmingham, said: “High growth expectations among manufacturers is a key highlight of this phase of the recovery, with a stronger manufacturing sector set to benefit the region in the long term by rebalancing our economy away from London and the city.

“However, manufacturing is still some way off its pre-crisis peak and confidence in the sector has proved to be volatile in the recent past, impacting negatively on investment and hiring decisions. One current issue is the exchange rate, and the Bank of England has stated that further appreciation in the value of sterling would be unwelcome.  It will be interesting to see what the Bank can do to prevent this, although the large current account deficit may prove to be a drag on the pound as we go through the year.

“Another negative for our economy would be an acceleration of the revival of protectionist sentiment. Policymakers’ restrictions on immigration have not helped the labour market.  It would be disappointing if there was an equivalent move in industrial policy to protect companies in so-called “strategic” sectors.  Open trade creates higher wealth and income and the UK’s tradition in this respect is a fine one.”