Forward into broad, sunlit uplands

Political commentators tore Norman Lamont apart during the 1991 recession when the then Chancellor of the Exchequer made the grave mistake of claiming – prematurely – that he detected 'green shoots' of recovery in the economy. Just under two decades later, in 2009, former business minister Shriti Vadera provoked similar outrage by uttering the same phrase just as the latest crippling slump really started to bite. Politicians have, understandably, steered clear of combining these two politically explosive words ever since. However, if WM's latest Manufacturing Outlook research is any indication, Lamont and Vadera would be on safe ground today if they pointed to the green shoots of an economic upturn. Indeed, they could go further – the shoots are, it would appear, starting to blossom. Positive about business prospects A staggering 85% of respondents to our latest Manufacturing Outlook survey are positive about the business prospects for the coming year compared with 54% for 2013. This enormous surge in optimism is based on more than mere sentiment – the feel-good factor is bolstered by solid evidence of an upturn including a rush in domestic orders driven by the UK emerging, albeit tentatively, from recession. This trend is confirmed by a crop of business reviews including the CBI's latest SME Trends Survey. This reveals that total new orders increased in the three months to October for the first time since July 2012, driven by domestic orders (which rose at their fastest rate since January 1995). The CBI also predicts 2.4% GDP growth in 2014 and believes the UK will continue on a steady growth path through 2015. Further encouraging evidence comes from the Office for National Statistics, which says that manufacturing output rose by 1.2% in September, reversing a 1.2% drop a month earlier. And the good news just keeps on coming – think tank the National Institute of Economic and Social Research forecasts economic growth in the UK will come in at 1.4% this year and quicken to 2% next year. Reflecting these overwhelmingly positive reports, manufacturers are brimming with confidence, with 80% of the respondents to our survey indicating that they believe 2013 was when green shoots really started to sprout, largely driven by domestic order growth. And confidence in a sustained economic recovery in 2014 is high with 83% voicing optimism. There is a fairly even split over whether the green shoots are of our own making or a by-product of global forces. Just over a third of respondents (35%) believe that the UK is piggybacking on a global recovery and 12% think the reason for recovery is export growth to emerging economies including Brazil, Russia, India and China. A further 9% are convinced that house price inflation is the driving force, but 38% believe the upturn is being driven by a rebalancing of the economy towards manufacturing. This is a surprising finding. The manufacturing sector has been shrinking consistently since the 1970s. Optimism about manufacturing prospects was probably boosted in George Osborne's 2011 Budget speech, when he spoke of "a Britain carried aloft on the march of the makers". However, things have not worked out that way. Respected economist Andrew Sentance, a former member of The Bank of England's Monetary Policy Committee, said recently: "The output of services has now passed its pre-crisis peak, whereas manufacturing production is languishing nearly 10pc down on its early 2008 level." Although Sentance acknowledges that manufactured goods are the dominant element in international trade (accounting for 75% of all UK exports), he pointed out that services make up about 80pc of output and employment in the UK. He added: "While the UK has many successful manufacturing firms, our strengths are concentrated in a small number of sectors – aerospace, pharmaceuticals, high-value engineering and car production. Britain does not have the broad manufacturing base which has allowed Germany to be so successful in expanding its exports to Asia and other high-growth emerging market economies." A force to be reckoned with Nonetheless, manufacturing clearly remains a force to be reckoned with in the UK economy. Respondents to our survey report bumper order growth over the past year versus the same period in 2012. A massive 76% report more orders with 35% seeing a jump of over 10%. Again, domestic orders are the key driver. Revenue growth has been on the same trajectory as orders – 71% of respondents recorded growth this year and 57% expect to grow by more than 5% in 2014. However, despite the bullish mood, business strategies remain fairly evenly split between aggressive and conservative (55%/45% respectively). Manufacturers have made hay out of a stoic focus on improving business efficiency/CI, and a sudden charge for growth might not happen overnight. Nonetheless, as the business climate becomes more temperate, confidence grows. Indeed, we've not had such a significant increase in business confidence in the previous three Outlook surveys. Interesting to note, though, that it's not being driven by a co-ordinated plan to grow exports as the government has pushed for, but as a by-product of the UK recession lifting. Manufacturers growing in confidence One manifestation of manufacturers' growing confidence is the remarkably small amount of contact they feel they need with their bank manager. Around half of our respondents (49%) want contact only when they demand it, although an overwhelming 91% do judge their bank to be supportive. Input prices are on the rise – 71% of respondents to our survey report increases – and most feel confident enough of holding onto business to pass these rising costs onto customers. They are also secure enough to employ more people to meet burgeoning orders – just over half (50.5%) have done just that over the past year and 61% expect their level of employment to rise in the coming year. Another indicator of good times is the fact that 80% of factories awarded a pay rise in 2013. After enjoying such a great year, you might expect the entrepreneurial spirit to re-emerge with a vengeance, but it seems not. Almost three quarters (73%) said they would invest their extra returns in production or plant equipment. Could this be evidence of a play-it-safe mentality? While it's true that new machines will deliver operational savings, this sort of investment decision leaves manufacturers on familiar ground – it's low risk and low return. Far less popular among respondents to our survey are riskier growth strategies like investing profits in setting up an export arm to exploit opportunities in emerging economies. Just 13% of respondents are interested in placing their hard-earned cash here. Will this restrict the growth rates of manufacturing businesses or is it a sensible strategy? Only time will tell. More encouragingly, many of our respondents clearly recognise the importance of training – almost two thirds plan to spend on this critical activity in the coming year. This is good news – enlightened and progressive manufacturers recognise the need to upskill their employees to accommodate all the extra work coming in as well as to fight off increasingly ferocious competition. More than half of respondents (52%) plan to increase investment spend in the coming year, another sign of the general awareness that you have to speculate to accumulate. But you can't do it on your own; it is for the government to create the landscape in which you can conduct good and profitable business. Cutting energy costs is by far the biggest growth lever the government could pull with 55% of respondents citing this as crucial. Nothing came close to this – the next most influential action government could take to help businesses grow in 2014, was to increase capital allowances (at 13%). It is, however, debatable whether it is within Whitehall's gift to call a halt to the unrelenting upward march of energy prices. Although the energy companies claim that green taxes are forcing them to hike up their prices, many suspect that corporate greed is at the heart of the price rises. Despite Labour leader Ed Miliband's scathing attack on the energy giants and his threat to freeze gas and electricity bills, the Conservatives remain the party of choice for the sector gaining 57% of the vote in our poll asking who they would vote for if the General Election was held tomorrow. More people would abstain (16%) than vote Labour (11%) and the Lib Dems languish at the bottom of the heap with just 4% of our respondents' votes. UK manufacturing clearly remains predominantly true blue. Whichever party gains power at the next election, a stunning 88% of respondents to our survey believe the government should refine the regulations associated with public sector procurement to make it easier for UK companies to tender for national contracts. WM will be hosting a roundtable discussion with frontline manufacturers to debate the findings of our Outlook research in depth. If you would like to join it, e-mail ivallely@findlay.co.uk. Look out for a full report in the January issue. Top three priorities for 2014 1 Growing domestic sales 2 Increasing exports to EU 3 Investing more to maximise efficiency The upturn by numbers 85% are optimistic for business prospects in 2014 80% believe 2013 marked the start of the UK's economic recovery 83% are confident of sustained UK economic recovery in 2014 76% say their order books grew in 2013 over 2012 82% expect to see revenue growth this year View the results as an infographic.