Over the past three months companies have reported the strongest output and orders balances for a year, according to the second quarter Manufacturing Outlook survey published today by EEF, the manufacturers' organisation and business advisers BDO.
Trading conditions for manufacturers have been challenging over the past year, but the signs of optimism reported last quarter were justified with broad based improvements in output balances and expectations that the sector will see more positive news going into the second half of the year.

The domestic market has improved as companies report the first positive balance on UK sales since 2012q2. However, responses were somewhat weaker on export sales, and manufacturers are a bit less optimistic about a strong rebound in overseas sales compared with three months ago.

A further reason for caution in our survey is the drop in the investment intentions balance from +13% in 2013q1 to +7%, the lowest since 2012q2. Investment plans had proven resilient as output weakened, so this quarter's fall would be of concern if repeated as manufacturing investment is still some 19% below its pre-recession peak.

Ms Lee Hopley, EEF chief economist, said: 'Positive manufacturing data has been somewhat easier to find in recent months and our latest survey provides further confidence that the sector's prospects are improving. While the demand environment in major European markets remains weak, and some individual industrial sectors are facing their own specific challenges, the improvement in output and positive expectations on orders bodes well for growth going into the second half of the year. However, a couple of aspects - namely the relative weakness in export orders and the softening in investment intentions - suggest that confidence may still need to be tempered for now.'

Tom Lawton, head of manufacturing at BDO LLP, said: 'There seems a definite lightening of the mood amongst manufacturers supported by positive order balances. However, recovery in the sector still remains tentative, clearly illustrated by firms' reluctance to commit to future investment plans. The survey results also shows that UK companies are less optimistic about export orders but it is not yet clear whether this is due to the difficulties in Europe or difficulties in establishing a sustainable presence is the fast growing emerging markets. It is at this important point where it is crucial for Government and lenders to get behind the numerous positive indicators emerging from the sector and do all they can to help build the momentum of a recovery or risk seeing things stutter once more.'

According to the survey a balance of 12% of companies reported increased output over the past three months, up from -1% in the previous quarter and the strongest since 2012q2. Orders balances also returned to positive territory, both at home and in overseas markets, with a balance of 3% and 1% of companies seeing increased orders respectively over the past three months.

While the survey continues to show differences between different manufacturing sectors, improvement in output balances by sector were fairly widespread. After a weaker q1, motor vehicles was the strongest sector in this quarter's survey. Basic metals was the only sector in which a balance of companies (-9%) saw a fall in orders in the last three months. Positive output responses were again reported by mechanical, electrical equipment and electronics.

Strong forward-looking output and orders responses have been maintained with a balance of 23% of companies expecting output to increase and a balance of 16% planning for an increase in new orders. However, there is some weakness in expectations of export sales with a balance +10% of companies expecting growth, compared with +16% last quarter. No sector is reporting negative output or orders expectations for the next three months.

However, investment balances are at their weakest level since 2010q3 at +7%. The strongest positive balances were recorded in other transport and motor vehicles. Sustained difficult trading conditions and poor access to finance may be playing a role. In contrast, employment balances edged higher over the past three months and a balance of 14% of companies is planning to increase numbers employed in the next quarter.

EEF's forecasts for growth in manufacturing this year have been revised down again in large part as a consequence of the larger than expected contraction in output at the beginning of 2013. A decline of 0.5% is expected in 2013, with quarter-on-quarter expansion strengthening in the latter part of the year. The forecast for GDP is unchanged from the previous quarter at 0.9%.