The outlook for the UK economy and manufacturing in an uncertain world

Lee Hopley

EEF Chief Economist

24 April 2012

OVERVIEW

• UK economy has seen some significant growth challenges

• Strong manufacturing activity has boosted the economy through the recovery so far ..

• ..but no sign that risks and challenges will abate.

• Manufacturers still in pursuit of new opportunities

• There are still some cautious signs of optimism that industry will continue to grow this year.

• … but what about the rest of the economy?

THE STORY SO FAR….

Generating UK growth proving a challenge, but not all sectors are equal

Growth, rebalancing …neither?Contributions to UK GDP growth

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2011q1 2011q2 2011q3 2011q4

Households Government Inventories

Investment Trade GDP

%

Source: National Statistics

International risks have had an impact,% annual GDP growth in 2012

-2

0

2

4

6

8

10

US

Japan

China

India

Brazil

Russi

a

Euroz

one

World

Jan-11 Jan-12• Downgrades across the board.

• Eurozone crisis abated for now, but still presents significant downside risk.

• Contraction across the bloc in 2011q4…and in 2012q1.

• But confidence indicators in Germany have picked up a bit.

• The US had a stronger 2011h2 – manufacturing doing particularly well.

• But emerging markets will lead the pack again in 2012.

Source: Oxford Economics

And manufacturing output hit in 2011q4,index of production 2008=100

Source: National Statistics

85

88

91

94

97

100

103

106

2007

q1

2007

q3

2008

q1

2008

q3

2009

q1

2009

q3

2010

q1

2010

q3

2011

q1

2011

q3

2012

q1

?

25/4/12 – GDP day!

But 2012q2 gets off to a better start,% balance of change in past three months

-60

-40

-20

0

20

40

2005

q1

2005

q3

2006

q1

2006

q3

2007

q1

2007

q3

2008

q1

2008

q3

2009

q1

2009

q3

2010

q1

2010

q3

2011

q1

2011

q3

2012

q1

Output Orders Export orders%

Source: EEF Business Trends Survey

Recruitment and investment still planned,% balance of change in past three months

-50

-40

-30

-20

-10

0

10

20

30

40

2009

q1

2009

q2

2009

q3

2009

q4

2010

q1

2010

q2

2010

q3

2010

q4

2011

q1

2011

q2

2011

q3

2011

q4

2012

q1

Employment Investment %

Source: EEF Business Trends Survey

WHERE DOES 2012 GO FROM HERE?

Manufacturers focus on growth opportunities, but downside risks to UK starting to build

Sharp turnaround in expectations,% balance of change expected in next three months

-50

-40

-30

-20

-10

0

10

20

30

40

2005

q1

2005

q3

2006

q1

2006

q3

2007

q1

2007

q3

2008

q1

2008

q3

2009

q1

2009

q3

2010

q1

2010

q3

2011

q1

2011

q3

2012

q1

Output Orders%

Source: EEF Business Trends Survey

Firm-level indicators to end the year higher,% of companies expecting change in 2012

0

20

40

60

80

100

Permanentemployees

Temporaryemployees

UK sales Export sales Profitmargins

Productivity

% Increase Same Decrease

Source: EEF Executive Survey 2012

Manufacturers identify growth opportunities,% of companies

0 10 20 30 40 50 60

New technology/product development

Demand for low carbon goods & services

Demand for lower cost goods & services

Diversification into new supply chains

Demand for products in emerging markets

Demand for services in new markets

%

Source: EEF Executive Survey 2012

50% of exports not destined for EU,% change in manufactured exports by destination 2011

-20

-10

0

10

20

30

40

50

Total

EU

MENA

Irela

nd

Portugal

Spain

Brazil

China

Indi

a

Russia US

%

Source: HMRC

Growth from a broad base of markets,% expecting growth in markets in next 12 months and 5 years

0 10 20 30 40 50 60 70 80

Turkey

Russia

Brazil

China

Gulf states

India

SE Asia

Developed countries

%

Next 12 months

Next 5 years

Source: EEF Manufacturing Focus Survey

Progress in difficult markets,% of companies see barrier to emerging market entry

0 10 20 30 40 50 60

Differences in business practices

Exchange rate

Lack of knowledge about opportunities

Language difficulties / barriers

Poor credit protection

Shipping costs

%

Source: EEF Manufacturing Focus Survey

Longer term trend heading in one direction,% share of global output

China

Rest of World

US

EU

Japan

S America

Asia (exc China)

MENAIndia

ChinaRest of World

US

EU

Japan

S America

Asia (exc China)

MENAIndia

Source: Standard Chartered

2010 2030

Challenges still on the horizon,% of companies citing risk to growth in 2012

0 20 40 60 80 100

Significant movements in exchange rates

Global economic downturn

Deterioration in workplace relations

Significant upward pressure on pay

Access to external finance difficulties

Financial crisis

Raw materials shortages

%

Risks to growth

Most significant risk

Source: EEF Executive Survey 2012

Overall UK outlook more challenging

Investment outlook – Investment intentions not translating into increased capex. Credit cost remains elevated and EEF credit conditions shows limited signs of sustained improvement in availability.

Labour market – Labour market prospects still look weak; claimant count levels high. Proportion of temporary workers wanting permanent job growing and share of long-term unemployed rising.

Consumer – Confidence indicators are low, but stable. Economic situation weighing on consumers, household belt-tightening set to continue.

Recovery momentum to pick up in 2013,% annual change in output

0

1

2

3

2011 2012 2013

Manufacturing GDP%

Source: EEF

Conclusion

• A more challenging period

• The recovery in the economy and manufacturing entered a more challenging period at the end of last year after shaking off the effects of temporary disruptions.

• A more uncertain environment

• The potential for further euro-wobbles still present one of the biggest risks to growth.

• But still a more sustainable platform for growth

• Over the longer term, growth founded on higher investment and net exports offers a more sustainable platform for growth. Manufacturing is at the heart of this.