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Manufacturing and Engineering: Industry update issue 2

Welcome to the Close Brothers Asset Finance update of the manufacturing and engineering industry, where we highlight a wide range of issues relevant to SMEs in this industry.

Click here to view the Manufacturing Industry Update in full size

The results are based on the Close Brothers Business Barometer, a quarterly survey of close to 1,000 SMEs across the UK conducted by specialist independent researcher, Kantar, on Close Brothers’ behalf.

Our last Business Barometer results were received just prior to the lockdown and reflect a very different world to the one we now find ourselves in, where no-one has escaped the impact of COVID-19.

Because of that, in this edition we instead focus on our newly-created Business Sentiment Index (BSI), which is a confidence tracker calculated based on business owners’:

  • Appetite for investment in their business in the coming 12 months
  • Access to finance and whether they’ve missed a business opportunity in the last 12 months due to a lack of available finance
  • Views about the UK’s economic outlook
  • Thoughts on their likely performance in the coming 12 months

Each measure contributes 25% of the final BSI score. We’ll analyse both the reasons for the current score but also take a look back to 2016 and see how the scores have fluctuated and the possible influences that caused them to go both up and down.

Business Sentiment Index

In January, the confidence of the manufacturing and engineering sector was at its highest following the election and certainty around leaving the EU. This was echoed in various indices and anecdotally as well.

Then came COVID-19 and, unsurprisingly, the outlook changed almost 180 degrees, with the score falling to 7.5, the lowest figure registered for manufacturing and engineering, surpassing even the impact of the elongated ‘soft’ Brexit uncertainty.

All that being said, some things don’t change - sentiment in our industry still tracks higher than the UK average, as it has consistently done, historically.

Unpicking the data

Appetite for investment

Starting with ‘investment appetite’, the number of firms looking to secure funding for investment remained remarkably stable with an almost identical number both post-lockdown (69%) and pre-lockdown (72%).

This is not about companies wanting loans purely to survive – business owners are looking beyond the immediate and are still confident they want to invest to grow and that it’s in their best interests to do so. It’s encouraging firm bosses are still ambitious and are thinking beyond the short and medium term.

Missed opportunities

The next measure that forms an important component of the BSI score looks at whether a company has missed a business opportunity in the last 12 months because of a lack of available finance. For the last few years there has been a strong supply of cheap finance from a wide variety of sources and typically, during downturns and recessions, the number of lenders in the market reduces and we’d consequently expect the number of firms missing opportunities to increase.

The figure for ‘missed opportunities’ has remained stable, with only a nominal increase in companies missing out, although we expect this to widen the longer the economy takes to recover.

Economic outlook

Predictably, respondents’ views about the economy contributed most to the dip in the latest BSI figure.

In January, 77% of those in manufacturing and engineering who took part in the research felt positive about the prospects for the UK’s economy; by the end of April, this had fallen to 46% as the lockdown measures continued to take effect.

The UK has proven to have an incredibly resilient economy, with well-established and well-run businesses able to ride out economic storms.

Predicted business performance

We ask business owners to predict how their firm is going to perform in the coming 12 months, and the differences between January and April is clear. The number of firms looking to expand has halved (although the figure is still a decent 23%) while those expecting to contract have more than tripled.

Positively, the dial hasn’t moved in terms of the number of businesses expecting to close down altogether.

Summary

What we take from these results is that expectations have shifted and for many it’s a case of metaphorically battening down the hatches until the storm has passed.

Yes, these are troubled times, but business sentiment has been at these levels before. We must not forget that for nearly two years from April 2018 business sentiment was high and there should be no reason why we can’t return to those levels.

Clearly, there any many dependencies – the world may well be a very different place in some ways, but fundamentally, our economy will run in much the same way as it did before COVID-19.

We remain realistically optimistic about what the future will hold and look forward to renewing acquaintances when the time is right.