As we laid out in our Economic Prospects report last week, in the face of government cuts, and muted consumer spending, growth in the latter half of 2011 will be reliant on exports and investment.
Today the Bank of England released its agents' report, which makes a couple of pertinent points about these two drivers of growth.
Firstly, they note that investment intentions are strengthening, even if total investment has slowed a little. Significantly, investment is stronger in those firms where growth is driven by exports. This would suggest that investment growth in this recovery will be closely tied to export growth, especially given expectations that domestic consumption will remain weak.
There is good news, then, as the agents report:
“Manufacturing exports continued to grow at a brisk pace”
Though they did note that:
“for some the rate was slowing slightly”
And this chimes with what we've heard from companies lately. On the whole exports are quite strong, even to Europe. In line with what the Bank of England have said, much of this demand is driven by the stronger German and French economies.
It seems, therefore, that the impact of European Sovereign debt crises on UK firms has so far been relatively contained. There hasn't yet been that “Lehman's moment” when the debt-crisis trips and becomes a fully-blown Europe-wide (or even world-wide) economic crisis.
But if the crisis does spill over, given our reliance on exports for growth, the risks are real. The fortunes of our major export partners, in particular, Germany and France, are very much tied to those of their fellow Eurozone members.