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 Source: National Statistics

International risks have had an impact, % annual GDP growth in 2012 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 Source: Oxford Economics

And manufacturing output hit in 2011q4, index of production 2008=100 Source: National Statistics ? 25/4/12 – GDP day!

But 2012q2 gets off to a better start, % balance of change in past three months Source: EEF Business Trends Survey

Recruitment and investment still planned, % balance of change in past three months 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 Source: EEF Business Trends Survey

Firm-level indicators to end the year higher, % of companies expecting change in 2012 Source: EEF Executive Survey 2012

Manufacturers identify growth opportunities, % of companies Source: EEF Executive Survey 2012

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

Growth from a broad base of markets, % expecting growth in markets in next 12 months and 5 years Source: EEF Manufacturing Focus Survey

Progress in difficult markets, % of companies see barrier to emerging market entry Source: EEF Manufacturing Focus Survey

Longer term trend heading in one direction, % share of global output Source: Standard Chartered

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