Manufacturers forecast long slow haul to recovery

The Economic Prospects 2010 report from the manufacturers' organisation EEF and accountants and business advisers BDO forecasts manufacturing will grow by 1.2% this year before picking up to 3.4% in 2011. But the report also forecasts the performance of individual manufacturing sectors is set to diverge sharply with some enjoying strong growth while others with longer lead times are only just about to see a downturn. For the economy as a whole, the best prospects for growth lie in the UK's export potential as the world economy returns to growth. And manufacturing will have a big role to play, the report says. This will lead to some rebalancing of economic growth in the short term as exports grow this year and the sector outpaces the rest of the economy. But as consumers remain wary and continue to pay down debt and rebuild savings the UK economy will grow by only 0.9% in 2010. Credit constraints and a slow recovery in profitability are also likely to hold back business investment. The report also highlights that risks to growth remain, not least from continued credit constraints and the impact of the electoral cycle on economic performance. However, further challenges will not be unique to the UK economy. Financial market risks and the need to address global account imbalances will play a part in determining global growth this year, and beyond. EEF chief economist, Lee Hopley, said: "Last year was a record year for all the wrong reasons and the outlook for the UK economy this year is far from certain, with little momentum behind a recovery until the latter part of the year. While a stronger global economy and weaker exchange should help pull the UK back to growth, benefiting manufacturers in particular, things could still go wrong." "The outlook for different manufacturing sectors is also highly variable. Whilst some can safely say the worst is behind them others are only just beginning to feel the chill. In what will be an uncertain world in 2010, companies will still be looking for stability from policy makers." At BDO head of manufacturing Tom Lawton (pictured) believes that for most sectors in manufacturing the damage and decline of the recession of 2008 / 2009 now appears to be giving way to a slow and difficult recovery in 2010 and some manufacturing sectors will continue to suffer, at least in the early part of 2010. He continued: "Manufacturers will need to continue to implement cost-cutting measures, including staff reductions, to maintain profits in what will continue to be a very challenging market. In addition the lack of access to credit will continue to cause major headaches for many manufacturers - in particular as the growth phase begins to place increasing demands on working capital. I have concerns that the early period of 2010 could prove very difficult and possibly fatal for some manufacturers. But looking forward and on a more positive note we feel that more significant growth in activity levels should begin in earnest towards the end of 2010 and gain momentum into 2011. Manufacturing remains very much in business in the UK." The report forecasts that those sectors which will lead manufacturing out of recession are primarily those exposed to export markets. Mechanical equipment (3.5%) metal products (3.6%) and metals (3.4%) will see strong quarter on quarter growth throughout the year. However, some sectors will struggle through 2010. Long lead times protected the aerospace, defence and shipbuilding markets from the worst of the recession, but output is set to fall this year in the other transport sector (-5.7%) as defence budgets are squeezed and civil aerospace remains weak. The auto industry will suffer a hangover (-5.3%) as funding from the various scrappage schemes in the UK, EU and US run out. While some sectors have bucked the wider manufacturing trends, others have merely seen a continuation of the decline that was in train before the recession started. Manufacture of computers, for example, has seen year on year declines in output since 2002 in response to a drift eastwards to lower labour cost economies. A similar trend has occurred in textiles, with relatively few plants able to compete with emerging economies producing for the mass market.