Growth is contracting, factory bosses warn

Most companies expect fewer orders next year than in 2011, according to manufacturers' body

Britain's manufacturing sector is poised to give up the strong gains it has made since the end of the last recession, the industry will warn today, undermining the Government's claims that it is beginning to rebalance Britain's economy.

The EEF, the manufacturers' organisation, will warn that growth in the sector fell sharply over the past three months, that the majority of companies expect their order books to shrink next year and that predictions for the performance of industry in 2012 have had to be slashed back.

"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," said the EEF's chief economist, Lee 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."

The warnings are disappointing because manufacturing has performed so well since the end of the recession in the final months of 2009, and the Government has repeatedly stressed its determination to see industry become responsible for producing a greater share of Britain's economic growth.

The EEF said that after six consecutive quarters of surveys of the sector showing near-record levels of new orders and output, there had been a marked deterioration over the past three months. Some 12 per cent more companies reported a rise in output over the three months to the end of November than a fall, while only 8 per cent more said they had seen increased levels of orders. The figures for the previous three months were 27 and 23 per cent respectively.

In some parts of the manufacturing sector, including the metals, rubber and plastics industries, the figures have now turned negative, though other areas, particularly motor vehicle production, are showing more resilience.

For now, manufacturers are reporting still reasonable levels of investment and recruitment, the EEF said, though it warned many companies have reined back expansion plans markedly since the last quarter.

The EEF's analysis is broadly in line with official data from the Office of National Statistics, which suggests the manufacturing sector has been broadly flat since the autumn, producing little or no growth at all.

There is also mounting concern about the outlook for next year, particularly with the sovereign debt crisis in the eurozone now beginning to hit export orders. Slightly more manufacturers expect orders to fall than to rise next year. Overall, the EEF has more than halved its forecast for growth from manufacturing in 2012 – cutting its prediction from 2.2 per cent to 0.9 per cent. The EEF warned that without support from the Government, the prospects for manufacturers were likely to deteriorate further, while independent experts added to the gloom.

Tom Lawton, the head of manufacturing at business consultancy BDO, said it was important to recognise that the sector could make an important contribution to Britain's efforts to produce good growth.

"Although exports have maintained a relatively strong performance in the quarter, the continuing problems within Europe, which is by far our biggest export market, are clearly having an effect and generally increasing a feeling of nervousness and lack of confidence," he said.