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FORECAST UPDATE

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As MTA members will be aware, we run our forecasts twice per year, but the Oxford Economics industry forecasts that under-pin those for our sector are compiled every quarter.  This article takes a quick look at the latest predictions and compares them with the MTA Forecast Update from the Spring - the documents and presentation from this are still available on the MTA web-site at https://www.mta.org.uk/members-area/mta-forecast-documents (in the Members only area) if you want to dig a little deeper into the comparisons.  The idea is that you can see the direction of any revisions to the forecast and assess these against your own experience of the market and your forward view over the next year or so.

At the high level within the economy, UK GDP is now expected to grow by +7.5% in 2021 and by +5.5% in 2022;  this compares with +6.8% and +5.6% in our Spring forecast.  There has been a larger revision to the forecast for manufacturing output (for this year at least) as this now stands at +7.9% (+3.9%) in 2021 and +3.5% (+3.0%) in 2022.  Broadly, the industrial sector has out-performed the economy in the recovery as large parts of the dominant service sector which involve close contact with individuals (hospitality, etc.) have, of course, been constrained by the extended lockdowns.

The sector recovery profile in the latest forecast round compares output levels each quarter with those in the 4th quarter of 2019 which is taken as the pre-pandemic level.  For unsurprising reasons, the pharmaceutical industry has not seen any sort of fall in output and while this is almost unique (within manufacturing the only other industry in positive figures throughout is soaps & detergents), the other industries have seen a wide range of trends and forecasts.

The worst affected industry in the initial lockdowns was automotive but there were also substantial reductions in the other key purchasers of manufacturing technology.  However, by the end of the quarterly forecast horizon in Q4-2022, output of the machinery and metal products industries is expected to be above the pre-pandemic level (by +6% and +3% respectively) and automotive output is forecast to be only -1% lower.  Aerospace is, by far, the worst affected industry and at the end of the forecast period, output is predicted to still be -24% lower than the pre-pandemic level.

The initial recovery in this industry has been weak and it is interesting to note that it is lagging behind the recovery in both Europe and the USA (with the latter helped by the large defence aerospace industry).  This is expected to continue right through to 2024, although from next year the pace of recovery should be similar but with the UK not catching up in terms of levels.  The main driver of this is seen as the decrease in competitiveness of the UK industry as a result of Brexit with the additional work needed to validate UK design certificates for use in EU assembled aircraft leading to a move of business back into the EU.

For the automotive industry, the short-term is dominated by the global supply problems for semi-conductors and the medium term recovery will be limited when the Honda factory closes later this year.  Longer-term, while the UK/EU trade agreement does include some reciprocity for content across the two areas, Brexit is still likely to lead to some loss of business, especially around new and replacement models where manufacturing in the EU is likely to be more attractive compared to the UK.

We have already noted that the machinery and metal products industries are expected to be above their pre-pandemic level by the end of 2022 and they are well on the way to achieving this as output of these industries stood at 98% in Q1-2021.  In the short-term, this positivity should be boosted by investment, the outlook for which has strengthened over recent months, with the super-deduction allowance helping this process.  This may have a detrimental impact on 2023 and 2024 if investment Is only brought forward but that is a long way away (in policy terms at least) with scope for that outlook to change.  This forecast is a balance between positives such as continued strength of construction (particularly housing related) balanced by the drag from aerospace for those elements of the sector for whom that is a customer.

Comparison of Output* Forecasts

 

June 2021 (latest)

 

Spring 2021 MTA forecast

 

2020

2021

2022

 

2020

2021

2022

GDP

-9.8%

+7.5%

+5.5%

 

-9.9%

+6.8%

+5.6%

Manufacturing

-9.5%

+7.9%

+3.5%

 

-9.9%

+3.9%

+3.0%

Investment Goods

-17.2%

+10.4%

+5.4%

 

-16.9%

+6.8%

+4.6%

Metal Goods

-9.6%

+8.4%

+4.0%

 

-9.5%

+3.2%

+2.9%

Machinery

-19.7%

+14.0%

+8.7%

 

-20.1%

+8.9%

+5.1%

Automotive

-25.6%

+23.8%

+4.9%

 

-25.6%

+23.5%

+3.5%

Aerospace

-26.6%

-13.8%

+11.8%

 

-26.6%

-6.4%

+14.5%

* except GDP

In conclusion, this forecast does suggest that we are running a little ahead of our Spring forecast for the machine tool and, in particular as this focuses on output, the tooling market.  However, uncertainty, although reduced, remains a key risk around the forecasts for the UK manufacturing sector.