United Kingdom
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 our latest analysis with EEF.
Economic Prospects 2010 [link to library item] 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. From this analysis, we believe that 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.
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. We welcome the recent UK trade delegation’s visit to India. 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 also 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. 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, there is a warning that low levels of investment remains an achilles heel, with investment by manufacturing firms is expected to grow by only 2% in 2010 having fallen by over a third during the recession.
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.
To read the EEF/BDO Economic Prospects report in full, please click here.
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