Manufacturers' optimism dampened by concern over euro stability and austerity cuts, according to KPMG research

Global manufacturers' optimism has fallen again as the nascent global economic recovery appears to have lost its momentum, according to KPMG and Markit Economics Global Business Outlook report, based on a survey of senior executives in large companies in the US, Western Europe and Asia Pacific.  

However, despite the survey indicating a lesser degree of positive sentiment within UK manufacturers (net balance of 49 percent down from 57 percent), six in ten UK manufacturers expect to increase their business activity next year largely due to export demand and a weakening pound. Along with this, a third of UK manufacturers intend to recruit staff in the next twelve months (36 percent - highest since Q1 2006).    

This appears, on the face on it, to be an encouraging response from manufacturers and should lift market confidence but waning global optimism and cuts in public spending in the UK are expected to loom over the sector in the coming year. Consequently, this could lead to a more cautious approach and a greater focus on flexibility in the manufacturing sector than before.   

Gautam Dalal, KPMG's UK Head of Diversified Industrials, said: "UK Manufacturers should tread with caution as they enter 2011.   In the UK, manufacturers' previous optimism is expected be dampened by the threat of cuts in the public sector, and the Euro crisis which is likely to increase uncertainty in businesses in the coming year.  

"Looking ahead a year or two, we expect that many UK manufacturers will shift their planning horizons to shorter periods. For tomorrow's manufacturer, flexibility is everything; they need to be able to react to changing market conditions quickly.

"In order to increase their flexibility, UK manufacturers may need to look at bringing their supply chains closer to home to secure supply, maintain output in challenging times, and allow shorter turnaround periods.  As a result, manufacturers' supply chains are likely to become more important and the most successful companies will likely be those who build adaptability and flexibility into them."

On the inventory front, UK manufacturers' inventories as a proportion of output are set to fall at a sharper rate (net balance -12 percent) in the coming year than was predicted in June.  This may also be an indicator of a drive to be more flexible in operating models, with shorter time horizons of weeks rather than months - the need for flexibility being a lesson learnt from the recent financial crisis.

UK manufacturers need to be mindful of the need for 'learning and innovation' which will be key to maintaining a place at the table in the global market place.  An encouraging sign by manufacturers is their intention to increase both capital expenditure and R&D spending over the coming year.  

On an even better note, the UK services sector optimism is at its highest since Q4 2007 - 54 percent expect an increase in business activity in the next 12 months, while only 13 percent of companies expect to decrease business activity.  

The survey indicates that growth in service companies has been steady over the past four years and is expected to continue to grow with over half of business leaders expecting business activity and revenues to increase in the next twelve months - outsourcing of work by local governments and government agencies is expected to be one of the main drivers of new business.   

As leading labour market indicators in the UK find that private sector job creation will more than offset public sector job cuts in the final quarter of 2010 a third of UK service companies expect to boost headcounts over the next year which is the highest proportion since October 2007. However, over half (53 percent) of service companies anticipate staff costs to be the main contributor to their overall costs.   

Gautam Dalal said: "On a broader point, the recent crisis has firmly reminded Europe of the need to keep its manufacturing base. It would be foolish to try to survive in the modern world on the back of a service-based economy alone and I think we're likely to see governments acting accordingly to rebalance their economies with this in mind.

"Overall the trend seems to be that while UK manufacturers are being more cautious, especially given the Euro crisis and public sector budget cuts - things are nevertheless still pointing in a positive direction with increased exports, increased recruitment, increased R&D and increased capital expenditure. Confidence may be weaker than before - but it is not weak per se. The recovery has not ended - but it has lost some of its gloss and lustre."

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