Manufacturing will lead UK’s economic recovery, states EEF

The UK’s manufacturing sector, spurred on by growth in export orders, is set to lead the continuing economic recovery in 2011, according to a report published today.

The ‘Economic Prospects 2011’ report published by EEF also shows that growth for the economy is set to be better balanced as investment and net trade start to make sustained contributions.

The report also warns that there are some significant challenges this year that not only shape EEF’s central forecast, but also suggest a degree of caution. These include a separate survey which shows potential direct impacts on manufacturers as government spending reductions take effect.

In 2010 the sector outpaced expectations and the overall economy by expanding 3.8 per cent. This year, another strong result is forecast with 3.5 per cent growth for manufacturing compared to 2.1 per cent growth for the economy as a whole. In 2012 growth is forecast at three per cent and 2.6 per cent respectively.

This balanced growth is broadly based across all sectors with the top performers forecast to include mechanical engineering and metal products, which benefit from having high exposure to export markets where demand is likely to be strongest.

‘At the start of 2010, shell-shocked from the worst recession in 80 years, forecasters across the country were wary of predicting anything more than very modest growth. But manufacturing picked up the baton and delivered its best performance in 16 years,’ said EEF chief economist Ms Lee Hopley. ‘Manufacturing now looks set to be at the heart of the rebalanced growth the economy needs with sectors most exposed to international markets likely to post the highest growth.’

Four risks to watch in 2011

Government spending cuts: According to a separate survey, one fifth of manufacturers expect to see direct impacts from the spending cuts coming through in reduced orders, particularly in the other transport sector as a result of defence cuts. Forty per cent of companies also anticipate some impact through their supply chains. However, this has to be seen in the context of 45 per cent of manufacturers agreeing that there will be greater market confidence in the UK’s ability to control its deficit.

Eurozone crisis: So far the export drag from Europe, both countries struggling with debt and those without, has been more than offset by strong export growth to emerging markets. However this could be put at risk if the crisis intensifies or in a worst-case scenario imperils the banking system.

Access to finance remains a key enabler for business investment and growth. The flow of credit remains seriously weakened by the financial crisis and EEF’s latest survey on credit conditions suggests the cost of finance is improving slowly.

Commodity price rises: After already feeling input price pressure in 2010, manufacturers are looking to pass some of this on in higher output prices. But strong demand from emerging economies could drive rises even further than EEF’s central forecast.

Source: EEF