Manufacturers’ organisation EEF has cut its outlook for the sector and the wider UK economy after downbeat responses to its latest survey of more than 400 companies. It shows firms are scaling back their investment and hiring plans as overall business confidence slips.
The Bank of England governor, Mark Carney, described the sharp fall in oil prices as “unambiguously positive” for the UK economy, but the latest report suggests the slump has sent negative ripples along the energy sector’s manufacturing supply chain.
Manufacturers reported a slowdown in UK demand over the last three months, mainly on the back of falling orders from the oil and gas industry for suppliers such as mechanical equipment makers, the EEF said in its survey.
“Manufacturers are marching to a slower beat in 2015,” said Lee Hopley, EEF chief economist. “Manufacturing is still growing, just not at the pace anticipated at the beginning of the year. The sector is still in positive territory, but the ground is looking a lot less firm beneath its feet. Much of this weakening is down to the impact of the decline in oil and gas activity on the supply chain.”
There were some bright spots in the survey, including improving expectations for exports to the UK’s key market, the eurozone, as economic growth in the region bounces back.
But the EEF expects the general weakening trend to continue and now predicts the manufacturing sector will expand just 1.5% in 2015, down from its previous estimate of 1.7% and almost half the 2.9% growth seen in 2014. The group has cut its forecast for overall UK growth to 2.6% from 2.8%. That compares with UK growth of 2.8% last year.
The weaker outlook deals a blow to the Conservative government’s hopes of rebalancing the economy by moving away from over-reliance on domestic consumer spending and towards more manufacturing and exports. The chancellor, George Osborne, declared during the last parliament that he wanted to see a “march of the makers” but manufacturing has yet to rebound to its pre-crisis levels of output.
The downbeat report follows official figures last week confirming Britain’s growth rate halved in the first quarter to 0.3% with net trade one of the biggest drags.
The business group CBI says growth is already bouncing back and hit its fastest pace for a year in the three months to May, according to its surveys of businesses across the main sectors. Its growth indicator, derived from CBI surveys of 811 businesses, showed an acceleration in all three main sectors: retail, business and professional services, and manufacturing. But manufacturing growth was only “modest”.
Firms’ expectations pointed to robust growth continuing but the CBI director of economics, Rain Newton-Smith, had words of caution about exports. She said: “UK exports are likely to be helped by renewed momentum in the euro area but the stronger pound and weak demand in many overseas markets continue to pose challenges.”
After growth tailed off in the first quarter and with inflation turning negative in April, the Bank of England is widely expected to leave interest rates at the record low of 0.5% when policymakers meet this week.
Ahead of the Bank’s announcement on Thursday there will be a clutch of reports providing more up to date clues on the state of the UK economy. The next purchasing managers index is expected to show only modest growth for manufacturers in May and a slight slowdown in the pace of growth in Britain’s dominant services sector.
The thinktank Capital Economics said the manufacturing sector had suffered “torrid start” to the second quarter.
“Given the strength of the pound, and the sluggish recovery in the eurozone, we doubt that the UK’s economic recovery will make much progress in rebalancing towards manufacturing and exports this year,” its analysts said in a preview note.
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