Advanced Manufacturing in positive economic health, but not without its risks, finds MTA

At the Manufacturing Technologies Association we keep a close eye on all the economic news as well as undertaking our own research into machine tools and cutting tools, amongst others. We have analysed the data, looked at the trends and have outlined our conclusions for advanced manufacturing below.

An overview of the global economy shows that it is the US which is really driving growth at the moment. Although their GDP has only expanded at about +2% per annum in the period from 2011 to 2014, the US still looks likely to grow more strongly in 2015 and to continue to lead the world economy.

The euro-zone economy continued to contract in 2013, largely due to Spain and Italy, and although it returned to growth in 2014, it remains weak and the likelihood is that it will only expand modestly over the next couple of years. Within the euro-zone, Germany has benefitted from structural reforms but, in general, fiscal policy seems to have been too tight and has held back growth in the region. Spain and Ireland are starting to turn around, but France, Italy, Belgium and Netherlands are not improving and are arresting a general recovery.

Further afield the outlook for most of the emerging markets deteriorated as we went through 2014, although Indonesia seemed immune from having its GDP forecast reduced for 2015 from where it started the year. Growth in China is slowing sharply as the government looks to move away from an unsustainably high investment ratio of around 50% of GDP - in contrast, Japan and Germany have an investment ratio of 20-25%.

Back in the UK, recent revisions to data as a result of introducing a new methodology and some definitional changes have improved the view of history; it turns out the double-dip recession never happened and the great recession was about one year shorter than first estimated. That said, it still remains the deepest and longest recession since quarterly records began in 1948. The revisions have also affected data on investment (here it is the new definitions of what constitutes investment that has made the greatest difference) which also means that there is less scope for growth in investment to catch-up with the economy as a whole. But there are still plenty of reasons to be optimistic about the UK economy, the key industry sectors and investment spending over the next couple of years.

There are also some positive indicators for the manufacturing sector. Although the PMI surveys have fallen back from the very high levels that we saw in the second half of 2013 and into this year, they have remained positive. This continues to point to modest growth in activity in the manufacturing sector going forward.

Other positive pointers come from data on series such as profitability expectations and investment intentions; for the former series, data from the British Chambers of Commerce survey show this at record levels and their investment intentions series is close to its all-time peak - the CBI also has a series on investment intentions which, although not quite at record levels, is certainly well into positive territory.

The capacity utilisation indicator is also close to its highest levels suggesting that companies will need to expand capacity; a recent survey by EEF noted that 60% of companies felt that they needed to either significantly or moderately expand capacity in the UK.

Indirect threat

There are, of course, some risks to these forecasts and, as we have seen in recent years, these are mostly towards the downside. There is a chance that US growth and activity could be even stronger than anticipated, which would have a positive impact on our numbers, but the UK remains exposed to problems in Ukraine and the consequent sanctions with Russia. This had a limited direct effect on us, but perhaps more important is the impact felt through the rest of Europe which remains the UK’s major trading partner for engineering goods. This indirect threat comes in two ways; there are links into European supply chains which are slowed down because of the impact of the sanctions with Russia and there is also the general effect on confidence and the European economy.

Recently, we’ve seen a big change in oil prices which, while lowering inflation - perhaps slightly artificially - has also had an impact on activity levels in the North Sea; very little of the activity there is profitable with oil at less than US$60 per barrel, and, as this is continuing to fall, it is likely that this will have a negative impact on industrial activity.

As a result of all these factors, we expect UK machine tool demand to increase by +5% in 2015;  this is slower growth than in 2014 which looks likely to come out at around +9%, but the industry is generally operating at a high level, leaving little scope for stronger growth.  Regionally, Europe looks likely to be the only part of the world where machine tool demand grew in 2014 with the sector doing much better than the economies overall in many cases.

Looking at machine tool demand in Asia, 2014 saw a mixture of strong growth in Japan, balanced by further falls in China and India and only modest growth elsewhere, although the prospects for 2015 look much more evenly balanced across the region which should return to growth overall.

In the Americas there was a small fall in machine tool demand in 2013 and something similar is expected once the 2014 results are published. That said, we still expect it to return to growth in 2015/16. In 2013, it was the US market, by far the largest in the region, that took a modest dip, while the other three countries (Brazil, Canada and Mexico) were all positive, while in 2014, the USA has recovered, but a large fall in Brazilian demand (which has seen a much weaker economy this year), coupled with a modest decline in Mexico has seen the region remain just in negative territory. For 2015, Brazil looks to remain weak, but the rest of the region should see growing demand for machine tools.

Overall, our own forecasts and analysis lead us to believe that, generally, we will continue to see positive growth in the coming years. MTA members can find more in-depth analysis on the MTA website.