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Business Outlook Survey for European ManufacturingEurope, 21.09.2009 EU manufacturing outlook turns positive in July: Recovery hopes led by UK and Italy.
The Summer 2009 KPMG Business Outlook Survey (PDF, 1 MB), which surveys over 3,700 manufacturing firms across the EU, shows returning confidence across the manufacturing sector, but sentiment remains much weaker than pre-crisis levels.
Following on from the record lows registered across all variables six months previously, the latest survey results show that confidence has rebounded somewhat across the EU manufacturing sector in the summer. The net balance for activity rises to +28.0, from -10.2, to indicate expected growth of manufacturing production by mid-2010. Revenues are also expected to rise (+18.8), albeit to a lesser extent than new order volumes as firms expect tough competitive pressures and pricing power is restricted. Though higher than one year ago, the net balances for output, new orders and revenues all remain below levels seen in 2006, 2007 and the first outlook period of 2008.
The national data show divergent trends. Manufacturing sentiment is strongest in the UK and Italy, which post the highest net balances of all eleven countries surveyed for business activity, revenues, new orders and margins. Activity is set to drop in Greece and, to a lesser extent, the Czech Republic. But revenues are expected to fall in five countries in total, highlighting expected tough trading conditions as firms compete to retain market share and attract new customers.
The input prices net balance returns to positive territory in July, but remains well down on the levels recorded in 2006-08. Input price inflation is forecast to strengthen, albeit only modestly, as the net balance rises to +8.1 from -27.5. By sector, inflationary pressures on costs are expected to be most intense in Timber & Paper, Chemicals & Plastics and Basic Metals. Italy posts the highest net balance of all countries (+33.1), followed by the UK (+19.3).
Reflecting intense competitive pressures, the output prices net balance remains negative in July. At -5.2, it signals that manufacturers expect charge inflation to soften over the next twelve months, albeit to a lesser extent than in the previous outlook period (-21.0).
With revenues forecast to rise more slowly than output volumes, and the divergence between the two inflation indicators, profits in the EU manufacturing sector are expected to improve only marginally over the next twelve months (+7.1, from -26.8). UK manufacturers are particularly bullish regarding profits (+36.0), while the only other countries to forecast higher profits were Italy (+19.1) and Germany (+4.5). Timber & Paper and Chemicals & Plastics expect to see the fastest gains in profits.
Although growth of output is set to recover over the next twelve months, EU manufacturers expect to continue cutting staffing levels (-13.6). Negative net balances are posted in all countries covered except for the UK (+7.6). The most severe job shedding is predicted in France (-26.1) and the Netherlands (-23.9).
With margins remaining under pressure, companies across the manufacturing sector expect to make further cuts to capital investment and R&D spending over the next twelve months (-13.6, -3.5). However, both net balances have improved markedly compared to January.
The inventory: output ratio remains close to January's record low in the latest outlook period (-23.4, from -27.2). Negative readings are posted across all eleven countries. Of the big-four EU economies, the UK shows the slowest expected fall in the stocks:output ratio (-20.7).
Commenting on the latest survey findings, Alan Buckle, Global Head of Advisory at KPMG said: "There is plenty of reassurance to be taken from such a return to optimism amongst manufacturers in Europe's industrial heartlands. The UK and Italy may have led the way in terms of sheer optimism but the fact that so many of their neighbours have posted swings of 30 to 40 points back into more optimistic territory must surely bode well for the future - as does the fact that inflation indicators appear muted.
"Before getting too carried away with talk of recovery, let us not forget that we are still firmly rooted near the bottom of the economic cycle; only the UK shows optimism on recruitment and there are more cuts signalled in investment. The fact that optimism is far less in evidence around the prospects for improved revenues tells us there is still some way to go on the road to full recovery.
"The question now must be - are businesses properly prepared for the upswing which these figures hint at? Expecting an upswing is one thing; having measures in place to actually benefit from weakened competition, fragmented markets and healthier customers is quite another. In time, those that failed to foresee what was a very dramatic downturn will likely be forgiven. History may be less forgiving of those who fail to prepare for the recovery."
About the survey: The Business Outlook Survey for European manufacturing is produced by Markit Economics for KPMG and is based on a survey of around 3,700 manufacturers that are asked to give their thoughts on future business conditions. The Survey is produced on a biannual basis, with data collected and published each summer and winter. The current survey is based on responses from around 2,000 manufacturing firms.
The countries covered by the survey are the UK, France, Germany, Italy, Ireland, Spain, Austria, the Netherlands, Greece, Poland, and the Czech Republic. The methodology of the Business Outlook Survey is identical in all countries that Markit Economics operates. The use of a widely recognised and well-regarded methodology ensures harmonisation of data, and allows direct comparisons of business expectations across different countries.
The Business Outlook Survey uses net balances to indicate the degree of future optimism or pessimism for each of the survey variables. These net balances vary between -100 and +100, with a value of 0.0 signalling a neutral outlook for the coming twelve months. Values above 0.0 indicate optimism amongst companies regarding the outlook for the coming twelve months while values below 0.0 indicate pessimism. The net balance figure is calculated by deducting the percentage number of survey respondents expecting a deterioration/decrease in a variable over the next twelve months from the percentage number of survey respondents expecting an improvement/increase.
Source: KPMG - GAI
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