'Confidence holds steady' in UK manufacturing sector

The latest Global Business Outlook survey by KPMG, finds the UK's manufacturing sector has maintained the relatively healthy outlook it had in the spring and is more optimistic than both the global average and than the UK service sector. The survey, compiled by research firm Markit on behalf of KPMG, found that 64 percent in the UK manufacturing sector expect a rise in business activity during the next 12 months (against 8 percent anticipating a drop, giving a net balance* of +56). In fact the sector in the UK has higher hopes of the year's prospects than manufacturers in most global economies, including China. Only Brazil (+77), the USA (+69) and India (+58) are more optimistic.

However, expectations have broadly plateaued, indeed slightly fewer manufacturers now expect growth in some of the key indicators, including revenue, new orders and profits, than in the spring. This makes the notable rise in the net balance of manufacturers expecting to increase employment (+26 compared to +21) rather a surprise finding.

Intentions regarding non employment investment remain positive but have fallen back slightly, with six point drops in the balances relating to increasing both capital expenditure and R&D budgets in the next year (to +9 and +11 respectively). This may be due to difficulty in making investment decisions in the face of continuing economic uncertainty, specifically relating to consumer confidence and the impact of public spending cuts. It does, however, conflict with the global trend which shows most manufacturing operations planning to increase such spending.

Gautam Dalal, KPMG's UK Head of Diversified Industrials, commented: "Across the UK manufacturing sector, it feels that we are experiencing a progressive recovery; something which is shallow but sustainable and with the fears of a double dip recession beginning to fade into the background. With most of the survey indicators levelling off, it is interesting that optimism is actually increasing around the prospects for employment. Of course, it's impossible to make out whether this translates to permanent, rather than part-time, jobs. Also, there is no doubt this confidence is to some extent reliant on the effects of our relatively weak currency. Nevertheless, the findings are indicative of a growing feel of sustainability within the recovery.

"Despite this, I fear storm clouds may still be gathering on the European horizon. There are now a number of key economies that are actively tackling national deficits and this must surely have a significant effect on the sector some way down the line. In addition, there is a general feeling of disappointment at the manner in which the UK government's stated aim to rebalance the economy and provide a real boost to manufacturing is yet to translate into tangible actions, effectively leaving the sector to fend for itself."

The UK service sector meanwhile has seen a sizeable fall in optimism about its prospects over the next year though the survey scores were still positive. Asked about activity levels 46% anticipate a rise versus 17% expecting a drop, giving a positive score of +29. However, this is a not only a 10 point drop from the spring's score of +39 but is the weakest level since April 2009 and is well below the global average score of +44.

About the survey
The Global Business Outlook Survey for worldwide Manufacturing and Services is produced by Markit on behalf of KPMG and is based on a survey of around 11,000 manufacturers and service providers that are asked to give their thoughts on future business conditions. The reports are produced on a tri-annual basis, with data collected in February, June and October.

The countries covered by the survey are the US, Japan, Germany, the UK, France, Italy, Spain, Ireland, Austria*, the Netherlands*, Greece*, the Czech Republic*, Poland*, Brazil, Russia, India and China. (*Manufacturing only)

The methodology of the KPMG Global Business Outlook Survey is identical in all countries that Markit operates. This methodology seeks to ensure harmonisation of data, and is designed to allow direct comparisons of business expectations across different countries. This provides a significant advantage for economic surveillance around the globe and for monitoring the evolution of the manufacturing and services economies by governments and the wider business community.

Data collection is undertaken via the completion of questionnaires three times a year at four-month intervals. A combination of phone, fax, website and email are used, with respondents allowed to select which mechanism they prefer to use.

*The KPMG Global Business Outlook Survey uses net balances to indicate the degree of future optimism or pessimism for each of the survey variables. These net balances vary between -100 and 100, with a value of 0.0 signalling a neutral outlook for the coming twelve months. Values above 0.0 indicate optimism amongst companies regarding the outlook for the coming twelve months while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase.

Questionnaires are sent to a representative panel of around 11,000 manufacturing and services companies spread across the global economy in the countries mentioned above. Companies are carefully selected to ensure that the survey panel accurately reflects the true structure of each economy in terms of sectoral contribution to GDP, regional distribution and company size. This panel forms the basis for the Global Business Outlook Survey. The current report is based on responses from around 6,200 firms.