Manufacturing performance exceeding expectations but road ahead to diverge – Tom Lawton

Britain’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 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, Ms Lee Hopley, said:
 
“Manufacturing has exceeded expectations so far this year with a broad based recovery based on 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 could diverge over the coming year.  
 
“Overall the road to more stable economic conditions is likely to be an uneven one. Policymakers also face a mixed outlook in pursuing the widely accepted need to rebalance our economy as investment looks like it will remain a weak point in the remainder of this year with risks and uncertainty still lingering for both manufacturers and the wider economy.  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 Bank of England and when the MPC will make the 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.
However manufacturers should remain optimistic. Despite the EU economic slowdown, there are fantastic opportunities for growth in other countries like China and India. We welcome the recent UK trade delegation’s visit to India. 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 expected to grow by only 2% in 2010 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.

To read the full report please click here.
 
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Notes to editors
EEF, the manufacturers’ organisation is the representative voice of manufacturing in the UK. EEF has a growing membership of almost 6,000 companies of all sizes, employing some 900,000 people from every sector of engineering, manufacturing, engineering construction and technology-based industries.
 
BDO LLP operates across the UK with over 3,000 partners and staff. BDO LLP is a UK limited liability partnership and the UK Member Firm of BDO International. BDO international is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity in its own country. The network is coordinated by BDO Global Coordination B.V., incorporated in The Netherlands, with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. In the UK the Belfast Firm is operated by a separate Partnership known as BDO - Belfast.