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EEF economic forecasts point to no let up in need to find growth

23 July 2012

The EEF has published it’s mid year economic forecast update which maintains a sub-par 0.2 per cent for the economy this year.

Lee Hopley
Lee Hopley

However, EEF further revised down the outlook for manufacturing in 2012 to -0.3 per cent (from a previous-0.1%) as the uncertainty in the Eurozone, the UK’s main export market, has continued to bite.

In addition, as part of its update EEF has also published economic modelling which looks at positive scenarios for recovery, but also the negative impact on the UK economy and manufacturing of a break up of the eurozone and a subsequent credit crunch.

According to EEF’s central forecast some stability should return in the second half of this year leading to a resumption of modest quarterly growth in GDP, whilst manufacturing activity should step up a gear as we enter 2013. The improving prospects for 2013 will continue to be driven by exports which are forecast to increase by 4.1% next year, mainly to markets outside the EU.

This has been a pattern that has been especially evident over the last 18 months with non-EU recently exports exceeding these to the EU for the first time. However, as has been the case through this stop-start recovery significant risks and uncertainty remain.

Commenting, EEF Chief Economist, Ms Lee Hopley (pictured), said: “The estimate for second quarter growth is again unlikely to flatter the UK's economic performance. But the bigger question is where we go from here. Our forecast scenarios show the importance of bringing greater confidence and certainty to the private sector. The rebalancing process would be kick-started if firms were to push ahead with investment plans.

“But our forecast also shows the risks from another big shock such as a euro break up or significant deterioration in credit conditions for firms and households. Either event would knock the economy for six once again and further delay the onset of any green shoots of recovery.”

Looking forward, in its upside scenario EEF sees confidence return and the recovery private sector investment finally materialise. This would provide a much needed boost to the economy and rebalancing. Pulling forward business investment growth would see overall GDP growth come in at a stronger 0.4% per cent and 2.3% per cent in 2012 and 2013 respectively and put us on a more competitive footing in the longer term.

The report also zones in on some of the major downside risks and models the potential impact of a eurozone default and possible effect on the economy and manufacturing.

Under the exit scenario where a Greek default spreads to a break up of the eurozone EEF estimates that the knock-on impact on UK manufacturing would be a drop in output of 1.3% in 2012 and 4.6% in 2013. However, exposure to eurozone demand varies markedly within manufacturing. For sectors such as investment goods and automotive markets outside Europe have been much more important in driving growth in the past two years.

Furthermore, according to EEF’s modelling if this were to lead to a tightening of credit conditions to the extent seen in 2007 and 2008, EEF estimates that this would wipe out the benefits of projected increases in business investment, with GDP not beginning to recover until 2014.

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