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A manufacturing contraction in 2012 could be followed by growth in 2013

23 July, 2012

EEF, the manufacturers’ organisation, has downgraded its forecast for the UK manufacturing sector and now expects output to fall by 0.3% this year, rather than the 0.1% it was forecasting previously. However, stability should return in the second half of the year, leading to a resumption of modest quarterly growth in GDP, while manufacturing activity should step up a gear in 2013.

The EEF`s downgraded forecast is a result of of the continuing uncertainty in the Euro-zone, the UK’s main export market. The improving prospects for 2013 will be driven by exports, which EEF expects to increase by 4.1% next year, mainly to markets outside the EU.

This pattern has been evident over the past 18 months with non-EU exports recently exceeding these to the EU for the first time. However, as has been the case through the stop-start recovery, significant risks and uncertainty remain.

“The estimate for second-quarter growth is again unlikely to flatter the UK`s economic performance,” says EEF chief economist, Lee Hopley (above). “But the bigger question is where we go from here. Our forecast scenarios show the importance of bringing greater confidence and certainty to the private sector. The rebalancing process would be kick-started if firms were to push ahead with investment plans.

“But our forecast also shows the risks from another big shock, such as a Euro break-up or significant deterioration in credit conditions for firms and households,” she adds. “Either event would knock the economy for six once again and further delay the onset of any green shoots of recovery.”

The report also focuses on some of the major downside risks and models the potential impact of a Euro-zone default and its possible effect on the economy and manufacturing.

If a Greek default were to spread to a break-up of the Euro-zone, EEF estimates that the knock-on impact on UK manufacturing would be a 1.3% drop in output in 2012 and 4.6% in 2013. However, exposure to Euro-zone demand varies markedly within manufacturing. For the investment goods and automotive sectors, markets outside Europe have been much more important as growth drivers during the past two years.

Furthermore, according to the EEF’s modelling, if this were to lead to a tightening of credit conditions to the extent seen in 2007 and 2008, this would wipe out the benefits of projected increases in business investment, with GDP not starting to recover until 2014.




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