The Economic Year in the Manufacturing Technologies
04 January 2016
When Mark Twain when asked what he thought of Wagner’s music at a concert he had just attended he said “It is not as bad as it sounds”; this could equally apply to some of the economic headlines that we are seeing at the moment about both the UK and global economies says the MTA's Paul O’Donnell
For example, there were a number of negative headlines recently when the UK GDP growth figure for the 3rd quarter of 2015 was announced at +0.5%; these stemmed from the fact that this was slower than the rate of growth in the previous quarter (as can be seen in the chart). However, growth in the UK remains reasonably robust at 2.3% year on year, and we expect this to pick up at the end of this year and into 2016.
Similarly, the gloom emanating from the slowdown in China is often overdone and has an impact on confidence which risks turning into a self-fulfilling prophecy. It is true that there are significant impacts for some countries and industries with investment in China slowing sharply (from a rate that was both unprecedented and unsustainable), especially related to construction and heavy industry, but China is moving to the next stage of development and starting to look more like a developed economy. This means that the middle classes continue to grow, supported by the growth of the service sector, thereby generating growing demand for cars and flights which is good news for these industries.
The slowdown in China is also a large part of the story behind falling oil (and other commodity) prices. While this is bad news for those countries supplying these items - including the oil & gas sector in the UK, although there are other factors at work in this sector with excess global supply - it is good news for consumer spending in the global economy and is helping to keep inflation (and, therefore, interest rates) low.
Returning to the UK economy, we see this reflected in effectively flat inflation (+0.1%) in November, with falling motor fuel prices one of the main negative drivers. We expect this to continue with the Bank of England pushing its expectations for inflation to get back to its target of +2% out to the end of 2017. At is December meeting the Bank of England’s Monetary Policy Committee voted by an 8 -1 margin to keep its official Bank Rate at 0.5% leading to commentators to push their expectations of a UK rate rise out to November 2016.
Coupled with a strong financial position for the corporate sector, this should support investment in the UK and although we have seen investment intentions weaken from where they were a year ago, they are still point to steady growth in investment over the coming 12 months.
The other main macro-economic items are the trade balance and exchange rates - not entirely unrelated issues. The UK’s trade deficit in goods narrowed in the 2nd quarter of 2015 to its lowest level since the 3rd quarter of 2012, but has widened again over the summer, although not quite back to where it was at the start of the year. The improvement in the 2nd quarter was due to a spike in exports and a fall in imports from outside of the EU, but this appears to be, at least in part a one-off effect in Chemicals.
The UK currently lies between a strong US dollar and a weak Euro; we, therefore, have an advantage in trade with those markets of the world which use the US$, including China, although the Euro-zone countries have even more of an advantage and, of course, the UK is at a relative disadvantage in Europe.
Exports of the key Engineering industries - Machinery, Automotive and Aerospace - have all seen exports to non-EU countries move ahead, but there is only a marginal fall in Machinery exports to the EU in 2015 and deliveries to this region from the Aerospace industry this year have grown to their highest level since the current series began in 1998.
So, before we turn to our forecasts, we need to take a quick look at the industrial landscape in the UK; the chart shows the value of output in the 4 key industries that we track. Output of the Automotive industry - much more of course than just the cars, with the UK making more engines than it does vehicles - is at a record high and looks set to expand further; assuming that the issues being faced by VW are restricted to that company (and there is every sign at this stage that this is the case), then UK producers such as BMW, Nissan and Jaguar Land-Rover should be well placed to grab market share. The Aerospace sector also looks likely to continue growing with Airbus recently announcing that it plans to accelerate production of the A320 family to 60 aircraft per month by 2019 - the delay is because it will take that long for the supply chain to ramp up to meet this level of output and, while not all of it will be in Europe, the UK will share in this growth.
The major weakness is in the Machinery industry; this is a diverse sector which includes pumps & valves - essential components in the oil & gas sector - and construction equipment where JCB has recently announced jobs losses as demand from China slows sharply with the reduction in spending on construction. The UK also faces headwinds in the Basic Metals industry where global over capacity and high energy prices in the UK have led to the recent crisis in this sector.
Metal Products, which covers both specific products such as boilers and furniture and sub-contract activity in both machining and forging/pressing, lies between the divergent trends of the other 3 key sectors for suppliers of manufacturing technology equipment. There had been an improvement in this industry in 2015 and although output fell back in the 3rd quarter, it was still above where it had been during 2014.
MTA publishes forecasts for the UK market for both machine tools and cutting tools. Both are driven by the trends in the key end-user industries, but the outlook for machine tools relies mainly on investment, while the cutting tool forecast is driven by the output trends for those industries.
We expect a fall in the UK machine tool market in 2015 of around 5%; the 2nd quarter of this year was exceptionally low, but there has been a recovery in the 3rd period and the year should end strongly with the delivery of significant order backlogs.
For 2016, we expect the market to pick up by just under +4%, with the underlying trend then flat over the next couple of years. It is worth noting, however, that all this is at a high level with all of the totals from 2012 onwards being above anything we have seen in the earlier part of this century.
The data trend for the cutting tools market shows that we think the market will fall by -2½% in 2015; there was a strong start to the year, but the 2nd and 3rd quarters have been weaker. Moving into 2016 we expect the situation to improve and, overall, we have growth of just over +1% next year and +3½% in 2017. Although the data series only extends back to 2008, it is clear that these changes are occurring in a market that is at a high level.
Returning to our title, despite some weak figures in certain areas and challenges ahead in some industries and markets, hopefully we have shown that the overall picture is not as bad as it may sound.
The Manufacturing Technologies Association is a trade association for companies working in the engineering-based manufacturing sector. Many of its members are involved in the construction and supply of manufacturing technology whilst other members deploy these technologies, and some are involved in providing services to the industry.
It provides relevant and specific industry intelligence as well as access to the latest developments in research and technology, as well as encouraging talent through funding and support for workplace training and education initiatives in schools, colleges and universities.