Economic Prospects for the UK and Manufacturing

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Brighter prospects for the economy take centre stage

Today we released our half-year Economic Prospects report with upgraded forecasts for the UK economy and manufacturing. We are expecting greater momentum in the economy on the back of increased consumer spending, which will remain an important driver of growth, and improvements in wider economic confidence that will support some recovery in business investment. Strengthening in international markets, not least in Europe, the UK's largest export market, will also support this recovery.

Our forecasts in summary:

Prospects for GDP

  • We expect GDP to grow 1.1% this year, up from our previous forecast of 0.9%.
  • 2014 should see this growth gaining momentum with growth of 1.8% next year.

Prospects for manufacturing

  • Annual manufacturing growth is expected to turn the corner later than GDP with a contraction of 0.7% this year, largely due to a poor end of 2012.
  • However, we are forecasting quarter-on-quarter growth for the remainder of 2013.
  • And a strong rebound of 1.9% growth will boost the manufacturing sector in 2014.

But we shouldn't ignore the significant risks hanging in the wings

Despite the improved picture for economic growth in the UK, there are a number of risks, both domestic and international, that could derail this recovery. So what factors could throw our forecasts off track?

Business Investment

Successive postponement of investment forecasts has been a feature of forecasts since 2010 and business investment is currently 34% below its pre-recession peak. As such, rebalancing with more trade and investment driven growth is still some way from becoming a reality. Our central forecast expects investment to grow over 6% per annum in 2013 and 2014 as large corporate cash balances and heightened economic confidence suggests potential for recovery. However, any additional delays would hurt growth prospects for both this year and next. A worse-case scenario would see recovery in business investment pushed out until next year and meaningful growth pushed out until 2015.

The International Environment

Growth in export markets, especially to non-EU markets which have grown 45% in the last four years, will be a source of growth for the sector over the next few years. But any slowdown in world trade, for example driven by policy change in the US and China, would have implications for UK manufacturing. Some manufacturing sectors with stronger exporting ties to these countries would be hit harder than others and would continue the divergence in performance that has been a feature of the manufacturing for some time.

The Eurozone remains the UK's largest export market despite the fast growth in exports to other countries. And positively, activity in the zone seems to have turned somewhat of a corner posing less of a risk to UK growth prospects. However, with the challenges facing the sector even a slowdown in the pace of austerity in the more troubled Eurozone economies is unlikely to have much of an impact on the UKs short-term growth prospects.

So while manufacturing and indeed the economy as a whole have been heavily impacted over the last few years, a broad range of indicators in concert are signalling brighter prospects for the next couple of years. So expect to see more consistent growth over the next 18 months.

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