On Tuesday the MTA hosted our Spring Economic Update – at which we, and Oxford economics who work with us to produce our forecasts, present the six-month update of our annual forecast and discuss the reasons for it and the wider economic picture. The macro-economic part of the presentation saw Andy Goodwin, Associate Director at Oxford Economics, outline a UK economy which, while broadly in positive territory, could be better. The economy has been growing at a relatively subdued pace, certainly compared to what we saw in 2014/15, although some of the survey data has been somewhat muted.
Inevitably, much of his presentation focussed on Brexit; the period of uncertainty we have seen has boosted activity in building up stocks in 2019 as a hedge against supply chain delays but has been a drag on investment. The chances of a “no-deal” departure remain significant, not least because this is the default position if nothing else is agreed. However, this also makes the current deal (or something that looks very much like it) the most likely option, because opposition to “no-deal” is the only thing that Parliament can agree upon. The assumption that underpins this round of forecasts is that the UK will leave the EU on 31st October with a withdrawal deal triggering a transition period which currently runs to the end of 2020 but is likely to be extended by at least 1 year.
On this assumption, the outlook for the UK economy is for the modest growth to continue. There would probably be an appreciation in Sterling in the wake of a deal being agreed which would help the consumer to lead economic growth by contributing to lower inflation, although exporters would lose competitiveness at just the point when every bit of help will be needed.
The final part of Andy’s presentation looked at what could happen if the UK crashed out of the EU without a deal. Inflation is forecast to rise to around 3% as the exchange rate weakens further (by about 10%); this squeezes the UK consumer, dragging economic growth close to zero. The Bank of England would probably cut interest rates, perhaps as low as 0.25%, and the government could recycle its EU budget contributions into the economy in the short-term; however, a time goes on, this would lead to increased borrowing.
The 2nd presentation, delivered by MTA Statistician Geoff Noon, looked at the industrial situation, mainly in terms of both investment and output; the former of these is the main driver of our machine tool forecasts, while output leads the cutting tool expectations. Since last Autumn while there is little change in the overall manufacturing figures, output at the sub-sector and industry level has not always followed the path we expected and, while the same is true to some extent of investment, significant revisions to the data series have not helped in this case.
The investment picture is clouded by Brexit uncertainty but, despite that, sales of machine tools have held up remarkably well and, overall, we have not changed the forecast significantly from that of last October. The market is expected to fall by about 8% in 2019 before returning to modest growth in the following two years. Remember that this is based on the core assumption of an orderly Brexit at the end of October.
The output picture is mixed, with some challenges in both the data - most notably a gentle but steady fall for the Aerospace industry that is not consistent with members experiences - and in some customer industries - the weakness in the automotive market being the most obvious – making the forecasts uncertain but the overall picture has not changed much here either. Coupled with stronger than predicted sales from the MTA data our forecast for this market has not changed since last Autumn either and we still expect a broadly flat picture over this year and next at what is a high level of demand.
After a quick look at the global picture, more details of which can be found in both the presentations and documents on the MTA web-site, we concluded with a look at the implications of the major forecast risks for the industrial landscape. The key industries for the manufacturing technology sector are among the worst affected by the various down-side scenarios but benefit the most from the up-side risk of stronger global activity. The exception to this is aerospace which, because of its global nature, is less volatile than the automotive and mechanical engineering industries.
The presentations, complete with notes explaining the various charts and tables, are available for MTA members from our web-site at https://www.mta.org.uk/members-area/mta-forecast-documents - this is in the members area so you will need to login for access. The MTA Forecast Update document, with details of our forecasts for the UK market in machine tools and cutting tools, is also on that page, along with the Spring edition of the Global Machine Tool Forecast document and tables.