In the past two weeks we’ve blogged about the key results from our ‘Manufacturing Outlook’ survey as well as its regional breakdown. Today I will blog about the domestic and international economic environment shaping the survey results.
- Economy grew by solid 2.6% in 2014
- Slowdown in H2 due to weakness in overseas markets
- Slump in oil price sparks deflationary pressures
- Robust 2.8% growth expected for 2015
Domestic market drives balanced recovery
The previous year saw broadly balanced growth with all main industries - services, production and construction – making positive contributions to GDP. Nevertheless, growth was driven by demand in the domestic market and expansion in the production industries slowed in the latter half of the year as weaknesses in key export markets emerged.
While this divergence should begin to smooth out in 2015 as export markets recover, growth should continue to be driven by the services sector. Manufacturing is expected to grow by a healthy 1.7% in 2015 but slow considerably from 2.5% in the previous year to accommodate for the rapid absorption of spare capacity during 2014.
Oil price, (dis)inflation and the BoE
The nearly 50% slump in oil prices since June 2014 – mainly down to a supply shock from US shale - has sparked strong deflationary pressures in the UK economy. The full impact of lower oil prices should fully feed through this year giving a significant boost to consumer spending which is projected to continue to be a key driver of growth.
Oil price related pressures took UK inflation to 0.3% in the year to January – well below the Bank of England (BoE) target of 2% – allowing for the continuation of loose monetary policy up to 2016. The BoE has downplayed the dangers of persistent deflation as price pressures reflect external factors rather than UK consumer confidence, keeping mid-term inflation expectations anchored to around 2%.
- IMF cuts global growth forecast to 3.5% in 2015
- Eurozone marred in uncertainty
- Major emerging economies face slowdown
- Investment weakness to be partially offset by lower oil prices
Global growth in 2014 was tempered by the emergence of geopolitical uncertainty in the Middle East and Ukraine, persisting troubles in the eurozone, as well as a slowdown in major emerging economies – most notably China. These developments have dampened growth prospects for 2015.
The IMF now expects the global economy to grow by 3.5% in 2015 from the previous projection of 3.8%; EEF forecasts a slightly weaker profile at 3.3%. Two major developments are likely to shift global growth in the year ahead to above or below the baseline scenario; the oil price and the eurozone crisis.
The probability of a lower oil price providing a bigger boost than expected attaches an upside risk to the global growth forecast. By contrast, the renewed crisis in the eurozone could tip the scales on either side.
At the moment uncertainty over the possibility of a ‘Grexit’ is weighing heavily on financial markets despite the short-term agreement reached in February. A potential ‘Grexit’ would send shockwaves throughout the globe and possibly plunge the eurozone back into recession or close-to-zero growth.