This week's figures - what do they mean for growth in 2011?

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Two sets of statistics released this week look like good news for the UK economy.

Firstly the index of production showed that compared with last January manufacturing output in the first month of 2011 was up by 6.6%. Secondly, trade figures showed that the UK's deficit narrowed in January as exports grew and imports fell over the month.
So what does this mean for growth prospects in 2011?
GDP growth is driven by four key components: government spending, investment, household spending, and net trade. Spending cuts mean that government spending is likely to act as a drag on growth in 2011, and household spending growth is likely to be more muted given low levels of consumer confidence.
This means the main drivers of growth in 2011 will have to be net exports and investment.
In 2010 the majority of investment spending was stock building, whereas forecasts suggest that this year companies will expand their fixed capital investment. Continued growth in output along with strong company balance sheets and an increase in business profitability should help to fund this boost in investment. Similarly, the strong upswing in global demand, coupled with the weak sterling should support exports and lead to an improvement in the UK's trade balance.
There are however, reasons to doubt how strong growth in net exports and investment will be.
For example, net exports were a drag on growth in 2010, despite goods exports having grown at their fastest pace since 1977. The problem is that in 2010 imports grew even more quickly, as the UK imported intermediate goods to aid production. January's trade statistics are a welcome break from this trend – but the monthly figures are notoriously volatile – it will take more than one month of improving trade to drive growth in 2011.
Similarly, companies' investment should grow this year – for example our Business Trends survey showed strong intentions to invest – but there are questions around where this investment will take place. Even small and medium sized companies are considering investing outside the UK, to be closer to their markets and to take advantage of a more supportive business environment.
EEF's Budget submission, therefore, calls on the Chancellor to focus on supporting the right types of growth and to deliver a clear plan to address the distortions in the business environment that stand in the way of the private sector delivering this growth.


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