By Daniel Hunter

Britain’s manufacturers have upgraded their forecasts for economic growth this year but warned of significant risks should investment fail to make up ground lost in the last five years.

Publishing its half-year Economic Prospects report, EEF, the manufacturers’ organisation is expecting the UK economy to pick up momentum this year as increased consumer spending remains a key driver of growth and improved confidence supports a recovery in business investment.

As a result, EEF is now forecasting GDP growth of 1.1% this year, up from 0.9%. Growth is then expected to steadily increase through 2014 to 1.8%.
While manufacturing is expected to contract this year by 0.7% due to a poor end to last year, output is expected to pick up in the second half of the year and expand by 1.9% next year.

Continuing growth in exports, especially to non-EU markets which have grown 45% in the last four years, will be a source of growth for the sector along with recovering domestic demand.

However, any slowdown in world trade driven by weaker than expected activity in the US and China would have implications for some manufacturing sectors and, would continue the recent divergence in performance we have seen across the sector.

In EEF’s central forecast the outlook for employment has stabilised. While we may not see a repeat of the job gains posted in 2012, the pace of job losses is expected to be very modest this year and next and, well below those seen in the decade leading up to the recession.

Activity in the Eurozone may have turned a corner and, as the UK’s main export market, poses less of a risk to UK growth prospects. However, even a slowing in the pace of austerity in the more troubled Eurozone countries will have minimal impact in the short-term on UK growth.

Despite the improved picture for economic growth in the UK, EEF highlighted that the successive postponement of a recovery in investment has been a feature of forecasts since 2010, with investment this year forecast to be almost 10% down on 2012. This means rebalancing towards a greater reliance on trade and investment driven growth is still some way off becoming a reality.

Looking forward, large corporate cash balances and improving confidence in the economy suggest business investment now finally has some potential to recover. EEF is forecasting an increase of 6.4% in 2014 followed by 6.9% in 2015.

However, with business investment currently a third below levels seen in early 2008, EEF is concerned that any further delays to the upturn in business investment could dent growth this year and next. In its worse-case scenario of a return to growth pushed out to next year, the UK may not see any meaningful growth in business investment until 2015.

“The events of the last few years have heavily impacted on manufacturing but we are now seeing far more positive signs that growth will pick up. With the UK economy beginning to move through the gears and, glimmers of hope in the Eurozone, this should translate into more broad based growth for manufacturing in the next few years," EEF Chief Economist, Ms Lee Hopley, said.

“However, significant risks remain, particularly the continued failure of investment to show signs of life. We are still some way behind the previous peaks and, if we are to benefit from continued research, innovation and export growth then investment needs to pick up substantially. A failure to do so could see a build-up of problems in the supply chain and, our competitive position slipping.”

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