New Year, new cheer

Posted on 5 Jan 2011 by The Manufacturer

EEF's Steve Radley says manufacturing is at the forefront of a net trade led recovery in 2011

At the start of 2010, shell-shocked from the worst recession in 80 years, no forecasters predicted anything more than very modest growth.

It’s pleasing to say then, a year on, that growth both for the economy and manufacturing in particular has surprised on the upside. Indeed for the first half of the year manufacturing grew at its fastest rate in 16 years. Over 2010, we forecast that manufacturing will have grown by 3.8%.

If there was a dark lining to this silver cloud it was the performance of inflation, which has also been higher than forecast. The CPI stayed stubbornly above 3% throughout 2010, well above the 2% target. That’s caused no end of debate about when the MPC should end the extraordinary degree of monetary stimulus in the economy and start raising interest rates.

So far the exceptional uncertainty of the recovery has stayed their hand. In addition, though manufacturers have faced a range of rising costs, improving productivity and moderate wage increases have largely kept price hikes in check.

So what does the future hold in 2011 for the economy and manufacturing? Our central forecast is a continued recovery driven by growth in net trade and investment. Manufacturing is at the forefront of strong export growth, particularly to emerging markets, which saw strong growth in 2010. Indeed manufacturing sectors with a high involvement in trade, such as metal products and mechanical engineering, will likely show the strongest growth.

The economy should do better in 2011 than 2010 with 2.1% growth. As in 2010, manufacturing will again better this pace, with a forecast 3.5% expansion.

There are four big forces to watch out for in 2011 that not only shape our central forecast but also suggest caution, with some downside risk.

First is the government spending cuts. These will ensure government’s contribution to growth is negative and, along with the VAT rise, is likely to keep consumption growth weak. About a fifth of our members are telling us they see direct impacts from the spending cuts coming through in reduced orders, particularly in the transport manufacturing sectors. Additionally, 40% anticipate some impact
through their supply chains.

Our forecasts suggest that emerging markets
like China and India will indeed retain their growth,
though, and this will be vital given the uncertainty
caused by the eurozone sovereign debt crisis which
has already manifested in weak or negative UK
export growth during 2010 across the eurozone,
with Germany a notable exception.

Playing the credit card
As manufacturers start to feel more confident and
start to think about raising investment, restrictions
on access to finance will become more important.
The flow of credit remains seriously weakened by
the financial crisis. Our most recent credit conditions
survey shows a modest improvement but progress
remains painfully slow. Further progress addressing
problems in access to finance will be important by
2012 when several other factors including the banks’
refinancing needs and higher capital requirements
could make conditions even tighter.

Cautious optimism was something of a catchphrase
in 2010 and, given the uncertainty around the
economy is likely to remain one in 2011. This makes
it is vital that the government gets its Growth Review
right. While the public finances have weakened
the government’s spending power, it still has an
important role to play in clearing away the barriers to
growth. The first major announcements in March’s
Budget should give us a clearer insight into the
government’s growth agenda. By then, we should
have seen a further three months of solid growth in
manufacturing. But the recovery shouldn’t be taken
for granted and government can play an important
part in keeping the momentum going.