Delegates at our Spring Economic Update yesterday heard Andy Goodwin, Chief UK Economist at Oxford Economics set out the macro-economic background to our updated forecasts for the UK machine tool and cutting tool market. Geoff Noon, the MTA Statistician, then filled in the industrial details that have driven the revisions to our views from last Autumn.
The presentations from this event and the documents from both the MTA Forecast Update and the Spring edition of the Global Machine Tool Forecast are available via the Members Area of the MTA website at https://www.mta.org.uk/members-area/market-intelligence/ – you will need to login to access this, so please let us know if you are having problems doing this. At this stage, only the industry forecast presentation has notes included but we will update the macro-economic presentation next week. Similarly, while all of the Global Forecast documents are there, there is s short delay to the MTA version – we hope this will be available later today, but it may be Monday morning before this is finalized.
Inevitably, a significant proportion of the presentations was taken up with the implications of the various announcements on tariffs by the US President over the last few weeks. In his macro-economic presentation, Andy Goodwin highlighted that this takes us back to a position last seen in the 1920’s and 30’s, with the effective US tariff rate rising from around 2% to between 25% and 35%. Having said that, there are so many exemptions (such as USMCA compliant automotive parts) and special cases, including the 125% tariffs on China which make trade almost impossible, that it is hard to get to an accurate figure.
As in most trade wars, the initiator of the tariff increases – in this case the USA – will be among the worst off as a result. The size of the economy (measured by GDP) is likely to be smaller than would otherwise have been the case and inflation will be higher, especially for the next 12 months before the one-off price increases drop out of the calculation. This will only get worse if the 125% tariffs on China persist and the 90-day pause on the “Liberation Day” reciprocal tariffs is lifted.
The impact on the UK economy is relatively small, but still noticeable. Initially at least, and assuming that the UK government does not retaliate in any way, this has been slightly disinflationary. Wholesale oil and gas prices have fallen slightly with the possibility of a recession in the US and the weaker US dollar against Sterling has made some imported goods cheaper.
However, significant risks remain, not least the negative impact of lower global demand. If the retaliatory tariffs remain, there could be a shock to supply chains which will lower economic activity and increase prices, at least temporarily.
Turning to the UK picture, latest data, both from the ONS and a range of surveys, have been mixed and volatile recently. Neither of these problems helps in assessing where things might move in the future. What is clear is that UK growth is likely to remain modest at best, despite what looks like being a good start to the year.
The debt dynamics for the UK look challenging, with only Italy in a similar position with high debt costs and low growth. The fiscal consolidation will be concentrated in the current budget year (2025-26) and at a level only slightly lower than in 2021-22. History suggests that solving these issues by raising taxes are less likely to succeed than those centered on spending cuts.
There are, however, some bright spots, including for the consumer who accounts for around 60% of UK GDP. Real income growth was very strong in 2024 and while this pace will slow in 2025, it still creates room for increased spending. There are also signs from a variety of surveys that the mood is improving modestly, which will be positive for economic growth.
Oxford Economics, in line with market expectations, still anticipate three cuts to US interest rates this year and probably a similar number in 2026. This feeds through more quickly in the corporate sector where most loans have shorter maturities or floating rates than the consumer market, which is now dominated by fixed rate mortgages (typically 2 or 5 years).
In concluding his presentation, Andy anticipated two more years of only slow growth for the UK economy, despite the headwinds of a challenging fiscal situation and the recent US tariffs.
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The second presentation, which focused on the industry picture, also began with a look at the various tariff announcements, although here it was mainly to illustrate the impact on the published forecasts. The timing of the round begins with Oxford Economics quarterly industry forecasts which were completed on 14th March; therefore, any announcements after this date – and notably those on April 2nd (Liberation Day) and the subsequent pause on 9th April – are not included in the core forecasts, either in the global report or the UK specific expectations.
The main impact to the core forecast comes in 2025 and 2026, although there are also some data revisions which affect the 2024 trends for the UK, unrelated to the tariff situation. For the investment picture, the UK now has a broadly flat trend in volume terms throughout the next two years.
The Global Machine Tool forecast is tested against a couple of scenarios, one of which looked at an increase in trade and geopolitical tensions. The tariff increases announced in 2nd April were even larger than in this scenario but it is still useful to note that this halved the growth in the world machine tool market in both 2025 (to +2.2% from +4.1%) and 2026 (+3.3% instead of +6.1%) before slightly stronger growth in 2027 (+7.3% rather than +5.9%), partly for base reasons.
China, Canada and Mexico are the most exposed to the negative impacts of the US tariffs and Europe (including the UK) is, relatively, less affected but there is also a sectoral element to this assessment. For the EU, the sectors with the highest ratio of exports to the US to gross output are pharmaceuticals, high-tech goods (electronics) and machinery, with the automotive industry al little way behind these three. However, because cars have a larger increase in tariffs, the overall economic effect to this industry is boosted above any assessment based just on its exposure to the US market.
Bearing in mind that our latest forecasts are based on modelling completed in mid-March and are, therefore, likely to prove slightly optimistic, we have downgraded expectations for the UK machine tool market in 2025 from growth of +5% last Autumn to a decline of -4% with, partly for base reasons, but also driven by lower interest rate and higher defence spending, growth in 2026 now at +7% (+6% in the October 2024 report).
The picture is slightly different for cutting tools; 2024 turned out better than we had expected, although only flat rather than a reduction on the year before and we have only edged down our expectations for 2025 to another flat year, with a modest recovery of +3% in 2026.On top of these forecasts, we also need to consider the impact of data revisions (most notably for investment), contradictory indicators (especially for the UK automotive industry), higher US tariff rates and possible increases in defence spending. The best we can manage is an assessment that our forecasts for 2025 and 2026 are likely to be a “best case” outcome and unless you have a focus on the positive areas of the industrial sector – mostly aerospace and defence – it is probably best to assume that the outcome will be lower than in our forecasts.