Trade credit insurer Atradius has published a new report revealing the challenges and opportunities facing the global machinery and engineering sector. The Atradius Market Monitor reveals that after a reasonably good performance in 2017 and a continuing trend at the start of 2018, growth within the sector is expected to slow alongside a rise in insolvencies.
The report details how, until recently, strong domestic demand has led to higher orders, increased work backlogs and an increase in capacity from buyers in the manufacturing sector, leading to an improved capital spending environment. At the same time, export-orientated machinery businesses have benefited from the weaker pound, recording higher demand and activity; albeit, price pressures have remained elevated due to increased import costs for commodities.
However, UK economic growth has started to slow down as Brexit uncertainty weighs on business investment alongside a tighter fiscal stance and higher interest rates. The Market Monitor expects the bulk of British machinery businesses, whose revenue is generated mainly in the domestic market, to be impacted by slower economic growth and lower capital investments into 2019. UK engineering value-added growth is forecast to slow down to 0.7% next year. In line with this more sluggish growth outlook, profit margins within the sector are expected to decrease over the coming 12 months.
Analysing payment performance in the sector, Atradius reports payment experience has been good over the past two years. However, with UK insolvency levels forecast to increase 3% in 2019, the pattern is expected to be mirrored in the machinery sector, with businesses related to oil and gas exploration, construction and agricultural markets mainly exposed.
Looking to the future, the report highlights how profitability in the sector relies on businesses’ engineering expertise and ability to adapt to new technology. According to Atradius’ Market Monitor, machinery and engineering businesses without the necessary skills and expertise will be particularly challenged.
Simon Rocket, Head of UK Risk Underwriting at Atradius, said “The profitability of individual machinery businesses is heavily influenced by the activity and health of the end markets they supply, such as retail, food and agriculture, construction, oil and gas exploration and power generation. The current economic challenges, and in particular Brexit is expected to provoke slightly different responses depending on the individual segment, but for all the challenges are unlikely to lessen in the coming months. Atradius is of course closely monitoring the ongoing Brexit process and the consequences for the economy as a whole and for UK businesses. The Machinery sector is heavily reliant on the domestic market and any sharp increase in economic uncertainty, accompanied by deteriorating fixed capital investment and tighter access to funding would severely affect the industry.”
“However, it’s important to be balanced and despite the ongoing uncertainty, growth opportunities are still out there within this sector. But, businesses need to make sure they have done the groundwork to protect themselves from the trade risks in order to seize these opportunities. Access to reliable business intelligence is vital and as a trade partner, Atradius is able to provide the insight, expertise and tools to support a business to mitigate risk and weather any potential storm on the economic horizon. “