Source: Markit Economics

The summer 2009 KPMG Business Outlook Survey, 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. In the BRIC region (Brazil, Russia, India and China), there is a strong and broad-based rebound in sentiment in manufacturing, following the drop seen in the aftermath of the financial crisis.

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), but 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."

Source: Markit Economics

Business confidence rebounds strongly in the BRIC manufacturing sector.

The summer 2009 KPMG Business Outlook Survey, which surveys around 1,800 manufacturing sector firms across the BRIC region (Brazil, Russia, India and China), highlights a strong and broad-based rebound in sentiment following the drop seen in the aftermath of the financial crisis.

July’s confidence balances show sharp improvements from the winter survey and, in many cases, have returned to levels broadly in line with 2008 readings. Optimism is underpinned by expectations for strong demand, coupled with signs of improving economic conditions.

The headline net balance for business activity climbed sharply from +3.6 in January to +46.5. That was close to the reading of +47.0 posted last summer, and suggests that output levels will rise at a marked pace over the next twelve months. Confidence is highest in Brazil, while firms in Russia and China also predict robust rates of expansion. While Indian firms are much less upbeat than their counterparts elsewhere (and are also less positive than was the case last summer), confidence has still shown a clear improvement from January’s depressed level.

BRIC manufacturers are encouraged by the prospects for sales growth during the coming year. A net balance of +44.8 firms predict higher new orders - - a considerable improvement from +4.9 in the winter. Consequently, business revenues are set to increase strongly, while expectations for company profits are the highest since the survey began in January 2008.

Panellists view increased new orders and an improving economic situation as the factors most likely to support growth of business revenues during the next twelve months. New product launches are also set to drive revenues higher. The major threats to revenues are perceived to be a potential relapse in economic conditions - - which could undermine sales - - alongside rising raw material prices.

With profits expected to grow strongly, BRIC manufacturers are set to step up capital expenditure during the next twelve months. Although the net balance of +22.0 remains below the levels seen in 2008, it is still a significant improvement from -7.4 in January. Companies are also set to raise their levels of investment in research and development. A net balance of +30.5 firms plan higher R&D spend, up from +13.1 at the start of the year.

Manufacturers across the BRIC region are planning to increase their staffing levels at a solid pace over the course of the next year, in contrast to expectations for net job losses in the January survey.

Positive hiring intentions have been influenced by the prospect of growing pressure on capacity - - a net balance for capacity utilisation of +36.2 is the highest since the start of 2008. Average purchasing costs are set to rise at a sharper rate during the next twelve months. At +37.3, the net balance for input prices is up steeply from -8.2 in the winter. Similarly, output price expectations have rebounded, as signalled by the net balance climbing from -8.5 to +25.2.

Commenting on the latest survey findings, Ian Gomes, Chairman of KPMG's High Growth Markets Practice, said: “The BRIC manufacturing sector appears to have swiftly returned to strength following the slump in confidence that ensued from last year’s global financial crisis. Robust growth is widely forecast - - based on expectations of improving domestic demand, the success of government stimulus measures and signs of stabilisation in the world economy.

“Faster growth is likely to be accompanied by a pick-up in inflationary pressures as demand for raw materials hardens and manufacturers recover some degree of pricing power. However, rates of inflation are forecast to be moderate in comparison with the elevated levels seen in 2008.”

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 Business Outlook Survey for BRIC manufacturing, is based on a survey of around 1,800 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 winter and summer. The current survey is based on responses from around 1,000 manufacturing firms.

The survey covers all four of the rapidly developing BRIC area nations: Brazil, Russia, India and China.