The Confederation of British Industry (CBI) has lowered its expected overall growth rate to 2%, but says that much of increase will come from a recovery in manufacturing.
Manufacturing is second only to construction in its prospects for growth following the recession.
A large part of the growth in manufacturing in recent months has been because of the stocking-restocking cycle. Manufacturing tends to decline very fast in a recession as other businesses leave it as late as possible before buying new stock for fear they won’t be able to sell all their existing stock.
Conversely, as the economy begins to recover, manufacturers will frequently experience a considerable “bounce” as other businesses restore depleted stocks.
Similarly, businesses will leave it as late as possible to replace or update equipment. The service sector, on the other hand, suffered a relatively smaller fall and is tipped for a more moderate recovery.
The UK economy came out of the recession in the last quarter of 2009. This means that if the economy continues its positive growth rate during the current quarter, by the end of September it will have grown for a year.
“The process of restocking has finished and what we’re seeing now is real demand,” says Lee Hopley, chief economist at the manufacturers’ organisation, EEF.
“There has been particularly strong growth from manufacturers exporting to emerging markets in Asia,” she adds. A weak pound and signs of economic recovery among many of the UK’s trading partners means that exporters are likely to see fast rates of growth.
There remain question marks over the mid- and long-term impact of the government’s austerity budget, particularly as regards next year’s rise in VAT to 20%.
The government’s Spending Review, due to be published on October 20th, will have a big impact on business sentiment as the government outlines how planned cuts in spending will be shared across all government departments. Spending on welfare and defence is widely tipped to be slashed.