The summer 2007 KPMG Business Outlook Survey, which surveys more than 3,700 manufacturing firms across the European Union, found manufacturers extremely upbeat about their business prospects for the next 12 months. Expectations for business activity, business revenues, new business and profits all stayed very positive, while manufacturers expected to increase their levels of employment and capital expenditure at the strongest rates in the two-year survey history. Annual inflation of input and output prices, meanwhile, is forecast to continue to head higher.
Almost 60 percent of all respondents expect their business activity to rise over the course of the coming year, compared to just 10 percent that expect their output to fall. The resulting net balance of +48.8 was down from the high of +56.3 recorded at the start of the year, but still indicative of strong optimism at EU producers.
The moderate decline in optimism since the start of the year largely reflected weaker (although still buoyant) confidence at German (+51.9 from +64.6), Italian (+38.6 from +53.9) and Spanish (+48.6 from +63.0) manufacturers, reflecting some concerns about the impact of higher interest rates, the strong euro and high oil prices on future growth. In contrast, optimism at French manufacturers held steady in July (+41.0 from +42.9) and rose sharply at United Kingdom producers to hit a two-year high (+59.8 from +50.7).
Czech (+61.9) and Polish (+61.8) manufacturers were most optimistic regarding future growth of business activity. Irish manufacturers were least confident (+34.1).
In line with the data on volume of work, latest figures showed manufacturers’ optimism regarding the future value of their work was also very positive, but down slightly from the start of the year (+43.0 from +49.6). The launch of new products, buoyant economic conditions and strong demand growth were all forecast to be key drivers of increased revenues over the next 12 months, while rising raw material prices were again identified as the most likely negative influence on revenues.
Higher raw material prices were also expected to exert the principal pressure on margins – identified by 71 percent of respondents as the biggest single threat to profits. Measured overall, manufacturers nevertheless remained upbeat with regard to future profits, with a net balance of +21.4 forecasting growth (from +27.3 at the start of 2007). Optimism varied markedly by country, however, with confidence highest at Polish manufacturers (+47.1) and lowest at German firms (+8.5).
A net balance of +44.9 manufacturers (from +44.3 at the start of the year) expect annual inflation of their purchase prices to be higher in a year’s time than at present, while +29.4 (from +30.4) forecast a higher rate of output price rises.
In response to the sustained growth of activity and new business, EU manufacturers expect to increase their spending on both capital and labor over the coming year. Optimism regarding capex hit its highest in two years of data collection (+24.7, which compared to just +11.5 in January 2006), while expectations for employment hit a similar high (+18.0 from just +4.1 in January 2006). Despite these efforts to expand capacity, utilization rates are set to rise (+41.7 from +46.6).
Commenting on the latest survey findings, Andrew Smith, chief economist at KPMG, said: “Although down a little from the highs seen at the start of the year, optimism amongst EU manufacturers regarding the outlook for their sector over the coming 12 months remained extremely buoyant in July. Well over half of all respondents expect growth of their business activity, revenues and new business to be sustained into 2008 – against around one in 10 that expect a fall – indicating that manufacturers are confident that their sector’s impressive growth dynamic won’t be derailed by rising interest rates, a strong euro and high oil prices. With much recent ECB focus centered on the impact of rising resource utilization rates on domestic inflationary pressures, the central bank will note with interest that over 50 percent of all manufacturers are predicting a further increase in capacity utilization rates over the coming year – and this despite expectations for both capital expenditure and employment hitting two-year survey highs. Expectations for input and output price inflation also remain at elevated levels meaning that ‘strong vigilance’ will indeed be the ECB’s watchword ahead of its September meeting.”
