Where will growth come from in 2012?

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Today we publish Economic Prospects: 2012 - our review of the key challenges that lie ahead for the UK economy and manufacturing in the next twelve months.

This blog sets out our central forecast for growth in 2012. Later today we will provide a couple of alternative scenarios.

If the economic outlook felt uncertain at the start of 2011, it is even more so as we enter 2012. If anything, the downside risks to growth appear more marked. This uncertainty is reflected in the huge range of expectations for the year ahead. Recent growth forecasts varied from predictions of an outright contraction of 1.3%, to growth of 2.0%.

Our own forecast is for GDP to grow by 1.0%, resulting from improvements in net trade and investment, but against a backdrop of weak consumer and government spending.

As with 2011, consumption is likely to be weak. The elevated levels of inflation which proved a major drag on spending last year should abate in 2012, but sluggish growth in the rest of the economy and a weak labour market are likely to hold household spending below par.

Investment was a drag on growth in 2011. We are forecasting a turnaround in 2012, with investment growth of 3% providing a strong contribution to growth across the economy. However, there are considerable risks around this forecast. Although manufacturing investment grew strongly in 2011 q2 and q3, total business investment contracted. And many of the factors that held back investment in 2011 will still apply in the year ahead.

While manufacturers still report intentions to invest, this could yet be delayed if the uncertainty caused by the eurozone crisis continues, or if cashflow and access to finance remain constrained. Neither of these risks is insubstantial.

Similarly, improvement net trade could be hit by the eurozone crisis, however, we are forecasting an improvement, particularly on the back of growing demand in emerging markets.

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