UK Manufacturing Exceeding Expectations

Economic Prospects 2010 report - EEFBritain’s manufacturers have outperformed expectations in the first half of 2010 but face the prospect of greater global economic uncertainty and financial market volatility in the rest of this year, according to latest analysis of the sector published today by EEF, the manufacturers’ organisation, and BDO LLP.

The Economic Prospects 2010 report (PDF – you will need to signup to the EEF website in order to get access to the report) contains the latest economic forecasts , which take into account official data for the first half of the year, the Budget statement, public spending cuts and forecasts for growth in world trade. According to the report, manufacturing will grow by 3.8% this year and 3.4% in 2011, outstripping that in the economy as a whole, which is forecast to expand by 1.1% in 2010 and 2.1% in 2011.

However, overall growth for manufacturing will mask sharply diverging performance of individual sectors. Some will enjoy strong growth on the back of weaker sterling and demand from emerging markets. Others, however, will show only moderate prospects for this year and beyond given uncertainty in developed markets.

While risks to the recovery in global demand have clearly heightened, continued growth in manufactured exports is forecast over the next 12 months. This will contribute to some rebalancing of the economy, but forecasts for a lag in investment places questions marks over whether this can be sustained in the long term.

Commenting, EEF Chief Economist, Lee Hopley, said:

“Manufacturing has exceeded expectations so far this year with a broad-based recovery, supported by growth in world trade, a weaker pound and restocking. But, with looming spending cuts here and more uncertainty in key markets, the prospects for different sectors will diverge over the coming year.”

“Overall, the road to more stable economic conditions is likely to be an uneven one. In seeking to rebalance the economy, policymakers face a mixed outlook, especially as investment is set to remain weak for the rest of this year. Manufacturers and the wider economy also face risks and lingering uncertainty. Whilst we have more clarity over the government’s fiscal ambitions, attention is now turning to where the cuts will hit and the difficult balancing act facing the MPC and when it will make its next move.”

Tom Lawton, Head of Manufacturing at BDO LLP commented:

“The better than expected results in the first half of the year have meant that manufacturers have remained buoyant about the economic outlook. However, there is an underlying nervousness within the sector. We still don’t know how the spending cuts announced in the last budget will impact demand for manufactured goods, while a reduction in government support could also hit the UK’s competitiveness in the global marketplace.

“But manufacturers should remain optimistic. Despite the EU economic slowdown, there are fantastic opportunities for growth in other countries like China and India and we welcome the recent UK trade delegation’s visit. However if the coalition government is to truly enable international growth in new markets, they must work closely with the banking sector to ensure appropriate financing structures and support is in place to enable businesses take advantage of new export opportunities.”

The report shows that the turnaround in world trade flows has been the driving factor in UK manufacturing’s recovery, with emerging markets playing an important role.

New analysis in the report shows that, since the recovery began, in all sectors there has been a larger percentage increase in exports to the developing BRIC (Brazil, Russia, India, China) economies than developed ones, particularly in transport and metals – a reflection of their stronger growth performance. The report forecasts that, for 2010, GDP growth in Brazil will be 7%, Russia 5%, India 8.2% and China, despite an easing, 9.4%.

Analysis of individual sectors shows the largest output expansion relative to end of the recession lows is forecast to be in non-metallic minerals and mechanical engineering. Both these sectors are forecast to exhibit consistently strong growth and, along with rubber and plastics, metal products and electrical engineering, to exceed 5% growth for 2011.

However, the report warns that low levels of investment remains an achilles heel. Investment by manufacturing firms is not forecast to grow until 2011, having fallen by over a third during the recession. As with sector output, there is considerable variation between industries.

For example, while investment by metal products firms is expected to grow by 29% in 2010, investment in by food and drink companies is forecast to fall by 33% over the year. Other sectors are that are investing strongly include electrical engineering and mechanical engineering.

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