By Maximilian Clarke

A slowdown in manufacturing growth has prompted the UK’s biggest manufacturing group to cut its growth forecast to just 0.9% in 2012.

Having achieved a consistently high rate of growth over much of the past 12 months, the damaging effects of Eurozone uncertainty on both international and domestic demand has led to a sharp slowdown.

“Manufacturing has been a key pillar in the recovery so far and it looks like the sector will still end the year on the up with positive output and orders responses posted over the past quarter. However, short-term confidence has all but fallen away,” commented EEF-the manufacturers’ group’s chief economist, Lee Hopley.

The Q4 Manufacturing Outlook survey showed that growth remained positive, but output and orders balances have dropped from historic highs at the beginning of the year to levels closer to their long-run average. However, prospects are mixed by company size and sector and there is clear divergence in markets with exports continuing to grow but the domestic market flat.

Looking forward the survey shows clear concerns about future prospects with a contraction in order books expected in home and overseas markets in the next three months. As a result, EEF has downgraded its forecasts for manufacturing to 0.9% growth in 2012.

“The signs of caution that had been emerging through the second half of this year have clearly become more entrenched as global growth concerns have escalated,” continued Ms. Hopley. There are not only question marks over wider manufacturing prospects at the beginning of 2012, but also the exports and investment needed to underpin sustainable growth.”

By sector, the divergence in performance which had become apparent last quarter has increased in the last three months. Basic metals, rubber and plastics and electronics both reported negative output and orders balances. On the other hand, sectors like motor vehicles and mechanical equipment have experienced a strong quarter. Looking ahead to the next three months, this pattern looks set to continue with other transport in particular looking strongly positive, on the back of strong demand from civil aviation.

Investment and recruitment still remained relatively positive. A balance of +18% of companies reported taking on new employees, well above the long term average for the seventh quarter running. Whilst investment was still positive at +12%, it was down from +18% in the last quarter and, with cashflow being severely squeezed, there are clear risks to this being sustained.

Looking forward, the volatility that has hit the global economy in recent months, especially in the Eurozone, has had a marked impact on confidence with expectations broadly flat with a small balance (-1%) of manufacturers expecting orders to fall. In line with the deterioration in prospects for the Eurozone economy in particular next year EEF has reduced its forecasts for manufacturing growth from 2.2% to 0.9% in 2012.

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