As we enter autumn are we really seeing sustained growth in the UK economy and, more importantly, is that growth filtering through to industrial product markets? Viewpoint by Paul Huggins, Associate Director, Carbon Trust.
The Carbon Trust engages with industry to understand and track market conditions, as part of the Energy Technology List (ETL) activities it conducts on behalf of DECC. The ETL is a list of approved products under the government’s Enhanced Capital Allowance Scheme, which enables businesses to claim a 100% first year capital allowance on investments in certain energy saving equipment, against the taxable profits of the period of investment.
The feedback that we get from industry allows the ETL to be responsive to emerging trends in energy efficient or renewable technology markets. Our engagement happens in several ways, including:
- ETL market research activities, where we talk with hundreds of product manufacturers and suppliers to ensure the ECA Scheme and ETL remain pertinent in the markets in which they operate; and
- In-depth discussions with a number of outstanding businesses that build energy efficient or renewable products right here in the UK. Each of these businesses has given us unique insights into the realities of selling in today’s industrial product markets.
There is nothing like talking with industry players to get a good feel for what is currently happening in the economy. Last December, at our two ECA events, it was clear from discussions with attendees that market conditions were tough. By April 2013 continued discussions with industry suggested business activities weren’t getting any worse and may be picking up. Since June things have been getting better. Based on our discussions with industry we expect some, not all, industrial product sectors to achieve growth that is between 2% and 5% - higher than the forecast average GDP level of growth for the year.
That’s our view, but what do other sources of data show? A review of data available from the HM Treasury, Markit/CIPS and the Office of National Statistics suggests that things do looking promising.
Figure 1: Analysis of UK GDP growth forecasts – baseline is the start of the 2013 financial year in April. Over the first six months of this financial year GDP growth forecasts doubled. Looking at a one year view (October 2012 to October 2013) growth forecasts have moved from a -1% contraction to 1.4% growth.
Each month the Treasury undertakes a comparison of nearly 40 independent forecasts of UK economic performance made by a mix of financial institutions and other interested market stakeholders (e.g. the CBI). A comparison of its April and October GDP forecasts shows that market expectations for GDP growth have doubled between April and October 2013 - moving from 0.7% to 1.4%. More impressively the 12 month view looks even better as GDP growth expectations changed from a -1% contraction to 1.4% growth (see Figure 1). Most recently, on the 13th November, the Bank of England raised its GDP growth forecast to 1.6%.
Each of these forecasts shows fair indications of returning business confidence. Clearly, this is good news which tallies with signs of increasing market confidence across a broad range of sectors, including services, construction and manufacturing. Based upon Treasury analysis the most significant drivers of GDP change have been driven by exports, government spending and private consumption.
According to the ONS, over the same April to October timeframe manufacturing output improved from a -0.6% contraction to 2.2% expansion. An analysis of Markit/CIPS UK Manufacturing PMI survey results for November supports the case for increasing optimism within the sector with a PMI score of 56 (50 = no change) – against a sub-50 score at the start of the calendar year. At the macro level PMI observations accord with the current ONS Production Data Index. However there is a ‘but’. Looking deeper into the ONS Production Index it can be seen that manufacturing growth is strongly tied to transport products. Other markets, including industrial products, performed less well.
The Markit/CIPS UK Construction PMI survey for November shows good growth in the construction sector with a PMI score of 57 - against a backdrop of a sub-50 score at the start of the year. Breaking down the PMI construction score indicates that of the three construction sub-groups (domestic, commercial construction and civil engineering) the weakest performer was commercial construction with PMI score of a 54, but well above the 46 it was at the start of the calendar year.
So what do these independent analyses really tell us? Well for one the UK economy is expected to grow more assuredly. That said there are some indications, such as ONS data, of mixed growth in industrial product markets. We expect some markets to grow strongly whilst others wait for sustained growth to filter through. Expected continued growth in the construction sector should, over time, create additional growth across all industrial product markets. This will be good news for businesses that sell energy efficient or renewable technologies because, assuming no additional economic shocks occur, current market data and sentiment supports the case that the markets for industrial products are picking up.