Poor investment could reverse gains made in manufacturing

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Britain’s manufacturers have upgraded their forecasts for economic growth this year but warned that concerns about investment could dent growth this year and next.

Publishing its half-year Economic Prospects report, EEF is expecting the UK economy to pick up momentum this year as increased consumer spending remains a key driver of growth and improved confidence supports a recovery in business investment.

Consequently, EEF is forecasting GDP growth of 1.1 per cent this year, up from 0.9 per cent. Growth is then expected to steadily increase through 2014 to 1.8 per cent.

EEF said in a statement that while manufacturing is expected to contract this year by 0.7 per cent due to a poor end to last year, output is expected to pick up in the second half of the year and expand by 1.9 per cent next year. Continuing growth in exports, especially to non-EU markets which have grown 45 per cent in the last four years, will be a source of growth for the sector along with recovering domestic demand.

However, any slowdown in world trade driven by weaker than expected activity in the US and China would have implications for some manufacturing sectors and, would continue the recent divergence in performance seen across the sector.

In EEF’s central forecast the outlook for employment has stabilised. Job gains posted in 2012 are unlikely to be repeated but the pace of job losses is expected to be very modest this year and next and, well below those seen in the decade leading up to the recession.

Activity in the Eurozone may have turned a corner and, as the UK’s main export market, poses less of a risk to UK growth prospects. However, even a slowing in the pace of austerity in the more troubled Eurozone countries will have minimal impact in the short-term on UK growth.

Despite the improved picture for economic growth in the UK, EEF highlighted that the successive postponement of a recovery in investment has been a feature of forecasts since 2010, with investment this year forecast to be almost 10 per cent down on 2012. This means rebalancing towards a greater reliance on trade and investment driven growth is still some way off becoming a reality.

Looking forward, large corporate cash balances and improving confidence in the economy suggest business investment now finally has some potential to recover. EEF is forecasting an increase of 6.4 per cent in 2014 followed by 6.9 per cent in 2015.

However, with business investment currently a third below levels seen in early 2008, EEF is concerned that any further delays to the upturn in business investment could dent growth this year and next. In its worse-case scenario of a return to growth pushed out to next year, the UK may not see any meaningful growth in business investment until 2015.