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Exports fuel growth of UK manufacturing

01 September, 2006

Exports fuel growth of UK manufacturing

The latest reports from the Confederation of British Industry, the manufacturers` body, EEF, and the Office for National Statistics (ONS) paint a fairly rosy picture for manufacturing in the UK — driven mainly by export orders.

According to the ONS, manufacturing output climbed for the third consecutive month in July. In the three months to July, factory output rose by 0.9% — the largest increase since May 2004. Output in July was 1% higher than it had been a year before.

An EEF survey of more than 1,000 British engineering and manufacturing companies, shows that UK manufacturing is being driven by growth in the US and Europe. The survey, conducted during August, reveals that growth is widespread across the UK, that investment remains firm, despite a squeeze on margins, that the jobs outlook is improving, and that firms are confident about the coming three months.

EEF is predicting a growth rate of just under 2% this year for the UK engineering sector, and 0.9% for manufacturing. It anticipates further growth next year — 2.5% in engineering and 1.2% in manufacturing — with all sectors showing some expansion.

"Our survey provides welcome evidence that UK manufacturers are exploiting the strength in world markets," says EEF chief economist, Steve Radley. "We have now seen four quarters of strong growth in exports — the best sustained improvements since 1995.

"With domestic order books flat, manufacturers are increasingly dependent on overseas markets," he adds. "Whilst, on the one hand, this leaves us vulnerable to a downturn in the world economy, on the other, the pressure of competing across the globe will help to keep a lid on inflation."

According to the EEF survey, the electrical equipment sector is showing the strongest performance, followed by mechanical engineering and electronics. The automotive industry is in the weakest position, and is the only sector forecasting a fall in output over the coming quarter.

Further evidence of the relatively buoyant position of British manufacturing comes from the CBI, whose August industrial trends survey shows that order books are in their best shape for 20 months. But the CBI says that the improvement seems to be driven by domestic demand, with the level of export orders remaining unchanged from the previous month.

The CBI attributes the improvement to stronger demand from the capital goods sector — including industrial machinery, aerospace and shipbuilding — coupled with a modest improvement in consumer goods.

"The outlook remains encouraging for UK manufacturers," says Ian McCafferty, the CBI`s chief economic advisor. "But it is disappointing that export orders have not improved more, given the current revival of the Eurozone economy — our principal export market."

Another recent CBI report says that export orders for small and medium sized (SME) manufacturers have grown for the first time in more than a decade, and are likely to continue rising.

The SME trends survey also shows that the volume of new orders has been growing at its fastest rate for nine years with medium-sized firms (those with 200—499 employees) faring particularly well and expecting significant increases in orders in the coming quarter. Over the past three months, mid-sized companies have taken on staff while smaller companies (those with fewer than 199 employees) have cut back on staffing levels.

Optimism among SMEs about the general business situation has improved for the first time in more than two years, reflecting a feeling of continued recovery after a long period of declining orders. However, SME`s costs have continued to rise sharply — although this pressure is forecast to ease in the coming months.

"These results are very encouraging and prove that the green shoots of recovery seen earlier in the year have continued to flourish," says Steve Sharratt, who chairs the CBI`s SME council. "Healthy order volumes have helped lift optimism after years of tough conditions, but profit margins continue to remain tight and costs are still rising.

"While things are clearly moving in the right direction," he adds, "there is no guarantee that this momentum will be maintained. Policy-makers must nurture this sector to ensure continued growth."

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