The manufacturing outlook has turned gloomy over the past few months. In line with the wider global economic outlook, the Office for National Statistics estimates that output growth was roughly flat in Q1 2012 after falling by almost 1% in the final quarter of last year. This showed that the level of activity fell to its lowest since the economy began to pull out of recession in the middle of 2009. Significantly the problems are not restricted to just the UK as industrial activity across many other countries in both the developed world and in emerging markets has also slowed or in some cases started to decline once again. This has been reflected in our own research, with Lloyds Bank’s most recent Business Barometer showing business confidence among manufacturing companies experienced two months of decline, falling back from highs of 27% in March to nine per cent in May.
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. The slowdown in exports has hit manufacturing particularly hard as manufacturing accounts for 40% of all of UK exports. It is wrong to blame manufacturing’s problems purely on the international environment, as a lack of domestic demand is also an issue. However, the international woes are severely constraining what seemed to be the best immediate source of demand for UK products.
2012 will continue to be tough. We are now expecting, at best, stagflation. Next year should see a return to growth and it is possible that manufacturing activity could grow by up to 2% but that is dependent upon at least some progress being made on the problems of the euro area.
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 by higher wage demands so far. We 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. UK producers are already making progress in targeting faster growing markets in other parts of the world and the growth rates of exports to these areas is impressive.
Global economic pressures are clearly dictating the outlook of industries like manufacturing. Historically, UK manufacturers have proven adept at adapting to changing economic conditions. The current climate is no different and, as a strong supporter of the UK manufacturing sector, Lloyds will continue to help companies maximise the opportunities available so that they are in a strong position for the future.