Source: Markit Economics

The summer 2008 KPMG Business Outlook Survey, which surveys over 3,700 manufacturing firms across the European Union, found that manufacturers’ confidence regarding the outlook for business activity over the coming year sank to a record survey low. Expectations regarding future activity have been on a downward trend since a high of +56.3 in January 2007 and, in July, the net balance of firms forecasting growth of activity tumbled almost 30 percentage points to just +14.1.

The most optimistic forecasts for the business outlook were from manufacturers in the Netherlands (+37%) and Germany (+26.1%), while the gloomiest outlook came from Spain (–26.6%) and Ireland (–5.0%).

Concerns about stagflation – the combination of deteriorating activity levels and rising inflation – were widespread in the latest survey period and significantly impacted on manufacturers’ optimism regarding their future performance. Confidence fell across all EU nations and all sectors covered by the survey in the areas of business activity, business revenues, new orders, profits, employment and capacity utilisation – in many cases hitting series lows. Meanwhile, expectations of higher input and output price inflation rose considerably, posting new survey highs of +65.1 and +42.6 respectively.

Against this background of mounting uncertainty, the latest survey found EU manufacturers scaling back forecasts for spending on new capital and R&D.

For the first time since the Business Outlook Survey began in January 2006, the net balances for both profits and employment turned negative. Slower expected growth of activity, new orders and revenues, combined with rising inflation expectations for costs, served to depress manufacturers’ forecasts for profits and employment.

Having previously moderated steadily from the high of +27.3 recorded in January 2007, sentiment with regard to future profits plummeted to -13.2 in July as almost 40% of manufacturers predicted a decline.

Meanwhile, a net balance of -6.9 EU manufacturers (down from +9.7 at the start of the year) expect to trim their workforce numbers over the coming year in response to weaker activity and rising costs.

Rapid input cost inflation was again highlighted by EU manufacturers as the single greatest threat to their future revenues and profits. Around 19% of all companies identified rising input costs as the biggest threat to their revenues over the coming year, while higher raw  material and energy prices were mentioned by 79% and 70% of respondents respectively as the two major threats to profits.

Deteriorating conditions in both domestic and global economies are also seen as major potential threats to future revenues and profits. A worsening economic situation was highlighted by 12% of panellists as a threat to revenues, while deteriorating domestic and global demand were reported by 54% and 52% of firms respectively as serious threats to profits.

The July Outlook survey found EU manufacturers making further downward revisions to their forecasts for spending on capital and R&D. Net balances for both variables have more than halved since the start of the year, recording survey lows of +6.8 and +6.4 respectively in July from +15.3 and +16.3 at the start of the year.

Commenting on the latest survey findings, Andrew Smith, Chief Economist at KPMG, said:“While there had been hopes that continental Europe would hold up rather better than the US or the UK this year, the picture has, in fact, deteriorated alarmingly – and the Survey suggests there is worse to come. Manufacturers’ sentiment has plummeted, with pessimism engulfing businesses across the board.

“The combination of rapidly rising costs, a strong euro and faltering global demand has smashed manufacturing confidence, pushing activity, revenue, new business and profit expectations to new series lows, while inflation expectations have hit new survey highs.

“This will make grim reading for the ECB, with the unprecedented declines in confidence a worrying reflection of the difficulties faced by EU manufacturing and the economy more generally. The one sliver of “good” news for policy-makers is the steep decline in capacity utilisation which gives some hope that below-trend output growth will limit second round inflationary effects.”

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.