A look at our new manufacturing forecasts

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We’ve revised our forecasts for UK manufacturing and the wider economy following the referendum last month and the results of our EU referendum survey. Today we take a look at our updated forecasts for manufacturing.

The high level of uncertainty about how things could play out in the wake of the referendum has led us to prepare three forecasts. One is our central expectation, which is what we consider to be the most likely to come to pass. The other two are scenarios of the worst, and best, that could happen.

The manufacturing outlook has deteriorated

The three forecasts are all weaker than what we had expected in the Manufacturing Outlook survey for 2016q2 in June, which was based on the assumption that voters would opt for the UK to remain in the EU.

The central forecast sees manufacturing output falling 0.3% this year and 1.1% in 2017. Previously, we expected a decline of 0.1% in 2016 and a rise of 1.2% next year. The central forecast assumes that the weakness of Sterling against major currencies boosts exports of UK manufactured goods. However, this is partly offset by slightly weaker demand from the EU caused by uncertainty as to whether the EU and the UK will be able to continue to trade freely. At the same time, domestic demand for manufactured goods weakens modestly, largely driven by uncertainty taking a toll on business investment.


In the worst-case scenario, the manufacturing sector contracts 0.6% this year and 2.7% in 2017. It assumes that the weaker Sterling has a modest positive impact on exports of UK manufactured goods but this is fully offset by a fall in demand from the EU. Also, domestic demand for manufactured goods takes a turn for the worst as uncertainty weighs on both business investment and consumer spending.

Leaving the best (case) until last, manufacturing output is expected to decline 0.1% and 0.5% this year and next, respectively. The main assumption underlying the scenario is that the weaker Sterling provides a material boost to exports of UK manufactured goods, demand from the EU holds firm, and domestic demand weakens only slightly.

A recession is on the cards for manufacturing

All three forecasts see the UK manufacturing sector going into recession, which is typically defined as at least two quarters of contraction in a row. However, the severity of the recession differs in each of the forecasts.

In the central scenario, the decline in the level of manufacturing output from just before the start of the recession until the trough is more than 2%. This compares to a peak-to-trough decline of 5% in the worst-case scenario, and a 1% drop in the best-case.


How do our forecasts compare?

This morning the Treasury released its monthly comparison of independent forecasts for the UK economy. The report showed that for manufacturing output in 2016, the forecasts ranged from a rise of 1% to a fall of 1.9%, with a median of a drop of 0.2%. Our three forecasts for 2016 are all within the range, while the median lies between our central forecast and best-case scenario.

So far, so good but things get a bit more complicated for 2017. The forecasts ranged from an increase of 2.6% to a drop of 2.8%, with a median of a drop of 0.2% (once again). While our forecasts were within the range, they are all below the median. The median looks too high to us. A possible explanation is that the median is skewed because the independent forecasts are an average of those made in the last three months. In short, the revisions forecasters have made in July are outweighed by those in the previous two prior to the referendum. So it looks like we could have to wait until next month to get a better idea of how our manufacturing forecasts for 2017 stack up.

Come back next week when we’ll be blogging our revised forecasts for the UK economy.


This person has now left EEF. Please contact us on 0808 168 1874 or email us at enquiries@eef.org.uk if you have any questions.

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