Scottish manufacturing remains resilient in turbulent times

Growth in Scottish manufacturing output volumes slowed significantly in the three months to July 2019, according to the latest CBI Industrial Trends Survey for Scotland. Total new orders continued to grow at an above-average pace, with strong growth in export orders being partly offset by a slight fall in domestic orders.

Following modest activity this quarter, manufacturers remain upbeat about prospects for the next three months. Total orders are predicted to accelerate, driven by expectations for a further pick-up in export orders growth. Domestic orders, meanwhile, are set to remain steady. While growth in numbers in work eased on the previous quarter, firms expect headcount growth to speed up again in the three months to October.

Average costs grew at their slowest rate since April 2016, and manufacturers expect costs to be flat come the next quarter. Stocks of finished goods in the three months to July grew at their fastest pace since April 2013 – with expectations of an even sharper acceleration in the next quarter.

Business optimism improved in the three months to July, while sentiment regarding export prospects for the year ahead continued to rise. However, the picture for investment also remains mixed. Although firms intend to scale back investment both in buildings and in training and retraining, they are looking to invest more in product and process innovation and in plant and machinery. Plans for spending on the latter are at their strongest since July 2014.

Notably, finance-related concerns as factors to limit capital expenditure in the next year picked up, with worries over the inability to raise external finance and the cost of finance both reaching survey-record highs.

“Substantial skills gap”

CBI Scotland Director Tracy Black commented: “With the October Brexit deadline looming, it’s not surprising to see a bit of a lull in activity as manufacturers brace themselves for further political wrangling and continued economic uncertainty. While it’s great to see that firms remain upbeat, particularly about exports, just think where we’d be with a good deal secured and the prospect of no deal firmly off the table.

“With Scotland still suffering from a substantial skills gap and firms beginning to recognise the need to prepare for automation and technological change, firms need to be able to have the right incentives to invest in the training and upskilling of their employees. The goal has to be to develop an agile, highly skilled workforce that is fit for the future and can help Scotland compete on the world stage.”

Key findings from the survey

Activity

  • Output growth slowed noticeably in the three months to July (+4%), compared with +17% the previous quarter.
  • Manufacturers expect output to pick up significantly over the next quarter (+28%).
  • Total new orders grew at a broadly similar pace (+9%) to the previous quarter (+6%). Domestic orders (-5%) fell at a slower pace than in the three months to April (-10%), while export orders grew (+24%) at a roughly similar pace as in previous quarters.
  • Manufacturers expect total new orders growth to accelerate in the next three months (+26%), with domestic orders being broadly flat (-2%) and export orders growing at a slightly quicker pace (+28%).
  • The proportion of firms working below capacity picked up noticeably (52% from 28% in April).

Prices and costs

  • Average costs in the quarter to July (+7%) grew at their slowest rate since April 2016.
  • Manufacturers expect average costs to be flat next quarter (0%).
  • Headcount growth eased slightly in the quarter to July (+9% from +14% in April).
  • Firms expect employment to pick up again next quarter (+16%).

Stocks

  • Stocks of finished goods in the quarter to July grew (+16% from -2% in April) at their fastest pace since April 2013. They are expected to accelerate further in next quarter (+21%).

Business sentiment

  • Business optimism improved in the three months to July (+8% from +1% in April).
  • Optimism about export prospects for the year ahead was broadly similar to last quarter (+7% from +9% in April).

Investment

  • Firms expect to invest less in buildings (-6%) and training and retraining (-16%) in the next twelve months. Conversely, they expect to invest more in plant and machinery (+10%), the highest balance since July 2014, and product and process innovation (+10%).
  • The proportion of firms reporting the inability to raise external finance (24%) and cost of finance (25%) as factors likely to limit capital expenditure in the year ahead were both at survey-record highs.

For more information about the latest survey data, email me or call me on 020 7099 2621.