Reports say UK manufacturing's recovery may be stalling

Two new reports have confirmed the uncertainty in UK manufacturing, with statistics which appear to show that the sector's recovery has slackened.

According to the first report, from the Engineering Employers Federation (EEF) and accountants BDO LLP, manufacturing firms outperformed expectations this year but face greater global economic uncertainty and financial market volatility in the coming months.

The second, from the Chartered Institute of Purchasing and Supply (CIPS), blamed weaker demand from the eurozone, and added that figures showed an easing in the pace of the sector's recovery.

The sector will grow by 3.8% this year, dipping to 3.4% in 2011, outstripping the rest of the economy, said the EEF report. EEF chief economist Lee Hopley added: "Manufacturing has exceeded expectations so far this year with a broad-based recovery, supported by growth in world trade, a weaker pound and restocking.

“But with looming spending cuts here and more uncertainty in key markets, the prospects for different sectors will diverge over the coming year. Overall, the road to more stable economic conditions is likely to be an uneven one. In seeking to rebalance the economy, policymakers face a mixed outlook, especially as investment is set to remain weak for the rest of this year.”

She continued: "Manufacturers and the wider economy also face risks and lingering uncertainty. Whilst we have more clarity over the Government's fiscal ambitions, attention is now turning to where the cuts will hit and the difficult balancing act facing the MPC and when it will make its next move."

Tom Lawton, head of manufacturing at BDO LLP, said: "The better than expected results in the first half of the year have meant that manufacturers have remained buoyant about the economic outlook. However, there is an underlying nervousness within the sector.

"We still don't know how the spending cuts announced in the last Budget will impact demand for manufactured goods, while a reduction in Government support could also hit the UK's competitiveness in the global marketplace."

Meanwhile, the CIPS activity index, where a reading over 50 indicates growth, sipped to 57.3 in July - the tenth month of growth in a row, but down on the 15-year high of April and May.

CIPS said the performance represented a robust start to the third quarter of the year, with further increases in both production and new work received encouraging firms to lift employment for the fourth consecutive month. Foreign demand showed only a slight improvement, with increased sales to the US and Asian clients offset by slower trade flows to Europe.

Rob Dobson, senior economist at CIPS's survey partner Markit, said the slowdown in exports will raise fears that growth may slow more sharply in the coming months.

He added: "Some slowing was to be expected, given the weakening in global trade flows that have been evident in recent months, particularly in Asia, as authorities act to cool their economies to ward off inflation.

"But the extent of the slowdown in export sales is very surprising, and suggests that UK manufacturers are losing out in the global recovery, which will disappoint those that are hoping the UK economy can rebalance away from domestic consumption towards exports."

The UK manufacturing industry has recouped around a third of the output lost during the recession, according to Mr Dobson.

The sector made a strong contribution to the 1.1% growth in GDP seen in the second quarter of 2010, although Jonathan Loynes of Capital Economics said the weaker trend in exports may limit the impact in the second half.

"The weakness of demand in the eurozone, coupled with the pound's recent appreciation, appear to have brought the export recovery to a halt," he said.

While average purchase prices continued to rise at a substantial pace, the rate of inflation slowed sharply to a five-month low, CIPS said. Companies reported a range of raw materials as being up in price, including chemicals, electronic components, energy and food products.

Howard Archer, chief UK economist at IHS Global Insight, said the fact that output and input prices rose at a reduced rate would be welcomed at the Bank of England. He added: "While they were still too high for comfort, this nevertheless boosts hopes that inflation has peaked and will continue to fall back."

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