Manufacturing confidence falters as operating conditions threaten growth

Optimism among manufacturers dipped in June for the first time in 14 months, as challenging operating conditions threaten to slow confidence growth in the sector, according to the latest Business Trends report by Bristol-based accountants and business advisers BDO LLP.

The BDO Optimism Sub-Index for the manufacturing sector, which predicts growth expectations in six months’ time, fell from 121.0 in May to 119.5 in June. Although it remains well above the 100 mark that indicates the long term growth trend, the dip suggests that manufacturers are taking a more considered approach to potential challenges, such as rising operating costs, which could act as a drag on growth.

In contrast, the outlook for the services sector is brighter, and June’s Optimism Sub-Index for services firms accelerated from 101.1 to 101.9 in June. This renewed confidence more than made up for the slack left by manufacturers, as the services sector represents a much larger part of the economy. This led to an overall improvement in business confidence, with the BDO Optimism Index rising by 0.4 to reach 104.8 in June, protecting economy-wide growth.

The mixed fortunes of the services and manufacturing sectors can be partly explained by the BDO Inflation Index, which remained broadly unchanged at 97.9 in June. This indicates continuing low inflation expectations across the economy, but could also mask the threat to manufacturers of rising oil prices, a major operating cost. Labour-intensive services firms, on the other hand, continue to benefit from low wage growth as spare capacity in the economy is used up.

In addition, the BDO Employment Index marks another potential headwind for manufacturers. Hiring intentions reached their highest level since the onset of the financial crisis in June, rising from 107.7 in May to 108.8. As businesses bolster workforces, demand for skilled workers will increase and could drive wage increases for skilled manufacturing workers. This bodes well for households, but could act as another drag on manufacturing firms.

Commenting on the findings, Graham Randall, partner and head of BDO LLP in Bristol, said: “Manufacturers are under growing pressure from a shrinking pool of skilled workers and potential input cost increases, but confidence in the sector is high and firms are still looking to expand well above their long term trend rate over the next six months. This month’s dip in confidence is a rational response to the issues that businesses face and nobody should have expected the stellar growth we’ve seen in manufacturing so far this year to go on forever.

“But we still don’t know when interest rates will rise and businesses cannot plan for growth on the basis of vague or conflicting statements – policy makers can do more to provide certainty for businesses, enabling them to make informed decisions for the future.”