Industry growth set to outpace rest of the economy, Make UK/BDO report finds

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Britain’s manufacturers are accelerating as growth prospects become significantly more positive for the rest of the year, according to a major survey by Make UK and business advisory firm BDO.

Having seen a brutal 10% decline in output in 2020, the sector is now set to recover a significant amount of that loss in 2021 and outpace the growth of the economy overall. This growth is based on a surge in both domestic and overseas orders which is translating into strong hiring intentions.

Investment intentions have also turned positive for the first since the first quarter of 2020, suggesting that the introduction of the temporary super-deduction tax’ in the Budget is having some impact together with improved growth prospects.

However, Make UK stressed that the figures are reflecting a recovery from a very low base with balances last year reaching record lows worse than those seen during the financial crisis. Between 2019 and 2020 the manufacturing sector lost approximately £18bn in value which will take more than a short-term boost of pent-up demand to return the sector to its pre-pandemic size.

Yet, Make UK forecasts do suggest, assuming vaccine effectiveness is strong, that manufacturing output levels will return to pre-pandemic levels by the end of 2022. That is earlier than previous forecasts had suggested.

Fhaheen Khan, Senior Economist at Make UK, said: “Manufacturing growth is now firmly accelerating as restrictions have been eased and economies around the globe have started to open up. Looking forward there seems no reason to believe that this will not continue, assuming the shackles come off firmly in the second half of the year.

“However, given we are coming from a very low base, worse than during the financial crisis, we have to bear in mind that there was bound to be a rubber band impact this year. Furthermore, for some sectors such as Aerospace the limited prospects for international travel in the near future means they may struggle to return to normal trading for some time.”

Richard Austin, Head of Manufacturing at BDO, added: “Manufacturers have fought hard to recover from the brutal impact of the pandemic and have made great strides since the start of the year.

“With investment intentions having turned positive for the first time since the first quarter of 2020, it appears the government’s introduction of the temporary super-deduction tax has provided the incentive manufacturers needed to bring forward their investment plans.

“We know targeted tax policies can have a huge impact but, with the melting pot of challenges ahead around supply chains, availability of basic commodities and rising inflation, we need the government to look at longer-term strategies to allow the sector to build back better and confidently invest over the next 10-15 years.”

According to the survey the balance on output improved to +36% from +9% in Q1 which is the highest balance in the survey’s 30 year history. Looking forward, output is expected to continue to improve with a forecast balance of +46% in Q3, which would be another record high.

Total orders also improved to +34% from +9%, with growth forecast to continue in Q3 with a balance of +36%. In contrast to the last quarter where there was a substantial divergence between domestic and export orders, both indicators showed significant growth with domestic orders increasing from +6% to +27%, while export orders recovered from a negative balance of -8% to +22%.

This surge in growth has also translated into strong recruitment intentions which exceeded expectations, improving from -6% to +20%, while investment intentions also turned positive for the first time since the post-2019 election boom, improving from -6% to +17%. While there may be some impact from the super-deduction tax Make UK stressed that, as with the figures overall, the improvement comes on the back of four quarters of substantially negative investment balances.

Mirroring other indicators across the economy the survey shows an increase in both domestic and export orders in response to supply shortages and increases in the cost of raw materials and shipping costs. This is not being translated into higher margins however suggesting that manufacturers’ profits are being squeezed.

As a result of the surge in growth Make UK has upgraded its growth forecast for manufacturing from +3.9% to +7.8%, ahead of its forecast for GDP overall of +7.5%.