UK manufacturing – past, present and future February 2012
Manufacturing past, present and future
Jan 21, 2015
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UK manufacturing – past, present and future
February 2012
Manufacturing output fell rapidly in 2008/9...
1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009-60
-40
-20
0
+20
+40
+60Volume of output
-53
-43-49
% balance
Source: CBI Industrial Trends Survey
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-70
-60
-50
-40
-30
-20
-10
0
+10
+20Total order books Export order books
...as demand both at home and abroad fell sharply...
Manufacturing order books (above/below normal)% balance
Source: CBI Industrial Trends Survey
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-40
-30
-20
-10
0
+10
+20 Raw materials Work in progress Finished goods
...and firms depleted inventories markedly
Volume of stocks% balance
Source: CBI Industrial Trends Survey
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010-70
-60
-50
-40
-30
-20
-10
0
+10
+20Total order books Export order books
Demand began to recover over H2 2009 and 2010
Manufacturing order books (above/below normal)% balance
Source: CBI Industrial Trends Survey
Export orders were boosted by a sharp depreciation in Sterling
Jan 2005=100
2003 2004 2005 2006 2007 2008 2009 2010 201170
75
80
85
90
95
100
105
110
Sterling effective exchange rate
Source: Bank of England
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-40
-30
-20
-10
0
+10
+20 Raw materials Work in progress Finished goods
Manufacturers began to replenish inventories
Volume of stocks% balance
Source: CBI Industrial Trends Survey
Both factors facilitated a strong recovery in the manufacturing sector
-60
-50
-40
-30
-20
-10
0
+10
+20
+30
+40Volume of output% balance
Source: CBI Industrial Trends Survey
But sharply rising costs led to a strong build up of inflationary pressure
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-40
-20
0
+20
+40
+60
+80Costs and output prices
Average unit costs Domestic output prices
% balance
Source: CBI Industrial Trends Survey
Sentiment deteriorated sharply over H2 2011
2006 2007 2008 2009 2010 2011 2012-70
-60
-50
-40
-30
-20
-10
0
+10
+20
+30Business optimism
Overall business situation Export prospects
% balance
Source: CBI Industrial Trends Survey
Concern over political and economic conditions abroad rose sharply
1972 1975 1978 1981 1984 1987 1990 1993 1996 1999 2002 2005 2008 20110
10
20
30
40
50
60
Factors likely to limit export orders: political/economic conditions abroad
% of respondents
Source: CBI Industrial Trends Survey
But demand began to recover at the turn of this year...
% balance
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-70
-60
-50
-40
-30
-20
-10
0
+10
+20 Total order books Export order books
Manufacturing order books (above/below normal)
Source: CBI Industrial Trends Survey
... supporting expectations for output growth
2007 2008 2009 2010 2011 2012-60
-50
-40
-30
-20
-10
0
+10
+20
+30
+40Expectations for output growth
(next three months)
% balance
Source: CBI Industrial Trends Survey
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013-15.0
-10.0
-5.0
0.0
5.0
10.0
Manufacturing output
Manufacturing output will continue to rise modestly ahead
y/y%
CBI forecast
Source: ONS/CBI
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 201370
75
80
85
90
95
100
105
110
Sterling effective exchange rate
A comparatively weak Sterling will continue to support export orders
Jan 2005 = 100
CBI forecast
Source: Bank of England/CBI
But longer-term challenges arise from a period of structurally higher commodity prices
GMO chart?
Source: McKinsey & Company: “Resource Revolution: Meeting the world’s energy, materials, food and water needs”, November 2011
Strong need to rebalance exports towards BRICs and emerging markets
United States
Germany Netherlands France China India Russia Brazil0
2
4
6
8
10
12
14
16
18 Share of UK exports (% of total) Average annual % growth 2011-16
%
Source: IMF/ONS
Destination of UK exports vs GDP growth forecasts
Sectors that exploit strong emerging market demand are likely to thrive
Automotive• Automobiles currently account
for 10% of UK exports
• Can benefit from strong Chinese demand – the world’s largest automotive market.
Civil aviation• Strong growth in global
passenger traffic
• But emerging market manufacturers also looking to establish presence
Electrical and optical & high-tech goods
• The UK already has a strong comparative advantage
• Rising incomes and demographic changes in EMEs – expect approx 10% growth per annum.
High end/luxury consumer goods
• A growing wealthy middle class in emerging economies will be a potential market.
Source: CBI
In summary…
● Manufacturing was severely impacted by the global downturn in 2008/2009.
● After a robust recovery, the sector saw softer activity in H2 2011.
● But, demand and output expectations have recently been stronger.
● Challenges ahead:
– Adjustment to a period of higher and more volatile raw materials prices.
– Need to sustain growth by re-orientating exports to high growth markets.
UK manufacturing – past, present and future
February 2012
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