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    RHYS HERBERT, Senior Sector Economist, on the economic outlook for the UK’s manufacturing sector.


    The immediate outlook for UK manufacturing continues to look tough. The Office for National Statistics estimates that output growth was roughly flat in 2012 Q1, after falling by almost 1% in the final quarter of last year (see Chart 1).


    Moreover, after showing some signs of stabilising in the first few months of 2012, the sector appears to have taken a downward lurch in the spring. The most clear cut indication of this is given by the latest manufacturing PMI report for May, which showed levels of activity fell back to their lowest since the economy began to pull out of recession in the middle of 2009.


    There are a number of factors behind this but the growing crisis in the euro area carries much of the blame. As domestic demand was always expected to be weak in the initial stages of the recovery, exports were supposed to play a key role in the upturn. Initially, at least, there were promising signs of this. Partly in response to competitiveness gains due to sterling’s decline during the recession, and partly in response to the rebound in global trade, UK exports picked up sharply in late 2009 and 2010. However, export growth has slowed sharply over the last 12 months.


    This deceleration seems to be primarily, although not solely, due to problems in the euro area. Despite some success in targeting other markets, the euro area still remains by far the UK’s biggest export market. So it was always going to be difficult to maintain export growth if that area faltered. Exports to the rest of the world have held up rather better, but even these are now showing some signs of slowing.


    The international picture is particularly important for UK manufacturing because so much of its output is exported. Manufactured products account for around 40% of UK exports, despite the fact that manufacturing only makes up about 10% of GDP. So the slowdown in exports has hit manufacturing particularly hard.


    Moreover, these international worries have reinforced concerns about the domestic economy as it has made both businesses and consumers even more reluctant to spend. In response, domestic orders for manufacturing goods have also slowed.


    Against this background the immediate outlook for manufacturing continues to look tough. The risk right now is that, as concerns about growth mount, both consumers and businesses put off purchases, adding to the pressures on producers.


    As a result we expect stagnation at best for manufacturing output and it is now very likely that output could fall this year, possibly by quite a considerable rate.


    Reasons for optimism

    Notwithstanding the current challenges, there are reasons to be optimistic about the outlook for UK manufacturing over the medium term. By and large UK companies should be very competitive at current exchange rate levels. Particularly as these competitiveness gains have not been eroded away by higher wage demands. We also expect the world economy to continue to grow strongly over the medium term, driven primarily by strong growth in emerging markets. This should offer up sizeable opportunities for exporters.

5/31/2020 10:05:58 PM