Can export strength compensate for domestic weakness in 2011q2?

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The UK economy has stuttered along since the end of 2010.

2011q1 growth was weaker than many expected, including the OBR and the Bank of England, at 0.5%. Taking into account the 2010q4 contraction, the economy has been flat for six months.

Prospects for the second quarter look moderate, with modest growth set to continue.

Consumer spending weakness in the UK in 2011 so far, received a boost in April from the bank holidays and warm weather. This impact however is likely to be temporary. UK households are continuing to feel the squeeze on their disposable incomes from the VAT rise in January and strong food price inflation.

Investment intentions continue to be clouded by uncertainties. Demand uncertainties have been further complicated by volatile and (until very recently) increasing commodity prices - for many firms this makes sitting on cash the smart option right now.

While 2011q1 overall showed an improvement in the UK trade position relative to 2010q4, this appeared to have weakened at the end with ONS stats showing the deficit widening in March compared with February.

This was driven by a contraction in goods exports to countries outside the EU, with falls notably heavy in intermediate and capital goods exports. Some analysts fear that recent softness in commodity prices might indicate weaker activity in emerging markets.

This is particularly important for manufacturers as emerging markets are where they have seen strength in the recovery.

But on the flipside, more traditional UK markets in Europe, notably France and Germany, are powering ahead, with the Germans in particular showing strengthening domestic demand (and in impressive 1.5% q/q growth figure for 2011q1).

However, there are reasons to think the recovery in trade will revert to type in 2011q2. EU countries, with the possible exception of Germany, are unlikely to be able to sustain strong domestic demand recorded in q1.

And strength still remains in emerging markets. China beat expectations for retail sales growth in 2011q1 and with inflation also beating forecasts, pressure continues to build for an appreciation of the renminbi – a benefit to UK exporters.

For Asia more generally, BBVA (for example), sees continued strong growth in 2011, albeit moderated by high oil prices and supply disruption from Japan's earthquake and tsunami.

In fact this supply disruption made it to the UK too, with UK outlets of Japanese-owned carmakers having some production restrictions.

This was perhaps part of the picture in April's manufacturing PMI, which declined to a seventh month low, following January's peak (though still very much in expansion territory).

How serious the Japanese impacts are remains to be seen, with some tentative indications that it may not be as serious as initially thought. What impacts we do see may be confined to the automotive sector in 2011q2.

The orders reading for the PMI underlined the contrast in strength between domestic and export markets. While this was already the case previously the difference, export market strength v domestic market weakness is becoming much more stark.

Export orders continue to be strong, particularly from emerging markets but also the U.S. and EU. But the domestic market appears to be weak and getting weaker.

Manufacturing powered through another strong quarter in 2011q1 and as my colleague Jeegar has noted is responsible for a larger share of the UK's recovery than its share of the overall economy i.e. manufacturing punches above its weight.

We'll be having a further think over the next few weeks about conditions for 2011q2 and coming to a view as to whether export strength will continue to deliver positive results for manufacturing and the wider economy.

Keep an eye out for our views early next month in the next edition of EEF's Manufacturing Outlook.


Media Team 020 7654 1576

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