Manufacturing industry 'holding up' in spite of slowing economy, says EEF

Despite the credit crunch, manufacturing industry continues to record growth and companies in the sector remain optimistic about the future, according to the latest survey by the EEF, the engineering and manufacturers' organisation, and accountants Grant Thornton.

While output and order balances are weaker in the survey conducted this month, compared with the last quarter of 2007, they remain above their long-term average. Investment intentions also remained strong and were up on the previous quarter, while more firms said they are expanding employment than cutting jobs, and expected this to continue.

The impact of a weaker pound is also benefiting exports. Sterling has devalued by about 8 per cent since the autumn, and export orders are "holding up" according to the EEF.

In terms of pricing power and margins pressure, the picture is again little changed from previous quarters. The official statistics have pointed to an increase in factory-gate inflation but the EEF suggests that pricing intentions remain relatively muted.

However, and despite the upbeat view o the future, official figures released by the Office for National Statistics over the past few weeks paint a more sober picture of activity, with a contraction in engineering and manufacturing in the final three months of last year.

Even the EEF only predicts engineering output to grow by 0.2 per cent in 2008, and manufacturing by 0.5 per cent this year. Even if industry were to grown by much more, it would be virtually impossible for it to take up all the slack from the slowdown in the financial services sector, as manufacturing only accounts for around 15 per cent o f the UK economy.

Bob Hale, the head of manufacturing at Grant Thornton, commented: "While manufacturing is this decade's true economic comeback kid, the sector is not completely immune to the inflationary pressures and weakening consumer spending that are already impacting on other sectors.

"Manufacturers should give greater weight to defensive investment in the coming 12 months, with capital directed at reducing energy usage and improving production line efficiency to counter the challenge of the rising cost of raw materials."

EEF's chief economist Steve Radley added: "It is vital that the forthcoming Budget does not make it more difficult for manufacturers to maintain their resilience by adding to the cost pressures that they face."

Separately, the Incomes Data Services research group said today that salary awards for managers and professionals in the private sector moved up to an average of 4 per cent over the three months to January 2008, following signs of a slowdown last autumn.

The latest figures – based on 134 separate management pay reviews covering nearly 26,000 managers and professionals – show that the current high rate of inflation is keeping pressure on management pay awards.

The highest average awards, worth 4.5 per cent, were received by board members; the average salary increase for middle and junior managers was 3.8 per cent; and the lowest awards were in the public sector at 3.2 per cent.