Manufacturing growth needs trade to remain on track

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The focus of a number of our recent blogs has been improving data for most parts of the economy and brightening prospects for the UK in the remainder of this year and through 2014.

Manufacturing to post growth this year, strengthening to 1.9% in 2014

Since the end of the 2008/9 recession manufacturing output growth has been strongest when the world economy and global trade flows were growing strongly. Last week's trade data showed that manufactured exports have been in the rise in the first half of this year. Growth in the second quarter, at 5.1%, was the strongest reported in three years. This stacks up our last Business Trends Survey which noted growing confidence that export sales would improve this year.

The stabilisation in both UK sales to the troubled eurozone and a trend of generally improving indicators from the region bodes better for growth across manufacturing over the next year. However, particular strength has come from companies finding more opportunities in faster growing, emerging markets. Ten of the best are illustrated below.

Emerging markets see growth for exporters - % growth 2012H1-2013H1Source: UK tradeinfo

Business confidence in EM slides

UK manufacturers have made good progress in developing new opportunities across a range of markets. But as confidence indicators improve in Europe and the US, the opposite trend has been emerging in Asia and South America. According to purchasing managers' indices in countries ranging from Brazil to Indonesia, confidence has been slipping. In India, manufacturing output has been heading south for the past three months and in Brazil, activity was at a 13 month low in July.

A world trade slowdown would shave 0.3pp off manufacturing growth in 2014

Overall we expect world trade growth to expand a bit more rapidly in 2014, picking up to an annual rate 4.7%. This would compare with more modest rates of growth of 1.8% and 1.3% in 2012 and 2013 respectively. But if this growth is knocked off track by, for example, weaker growth in some key emerging markets - including China - there would be a notable impact on manufacturing in the coming years, as shown below.

Slower world trade growth scenarioSource: EEF

Our central forecast for UK manufacturing remains optimistic that the recovery will stay on track this year and gain momentum in 2014. However, the ups and downs of global growth seen over the past couple of years points to some continued risks to this outlook. If global trade growth drifts off track, that could be one factor that dents growth prospects across UK manufacturing too.

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